Scandinavian Working Papers in Economics

Umeå Economic Studies,
Umeå University, Department of Economics

No 987: Maximum Likelihood Bunching Estimators of the ETI

Thomas Aronsson (), Katharina Jenderny () and Gauthier Lanot ()
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Thomas Aronsson: Department of Economics, Umeå University, Postal: Department of Economics, Umeå University, S 901 87 Umeå, Sweden
Katharina Jenderny: Department of Economics, Umeå University, Postal: Department of Economics, Umeå University, S 901 87 Umeå, Sweden
Gauthier Lanot: Department of Economics, Umeå University, Postal: Department of Economics, Umeå University, S 901 87 Umeå, Sweden

Abstract: We propose a maximum likelihood method to improve the bunching approach of estimating the elasticity of taxable income (ETI), and derive estimators for several model settings such as bunching with optimization frictions, notches, and heterogeneity in the ETI. Modelling optimization frictions explicitly, our estimators fit the data of several published studies very well. In the presence of a notch, the results can differ substantially from those obtained using the polynomial approach. If there is heterogeneity in the ETI, the elasticity among those who bunch exceeds the average elasticity in the population.

Keywords: Bunching Estimators; Elasticity of Taxable Income; Income Tax

JEL-codes: C51; H24; H31

41 pages, April 22, 2021

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