Scandinavian Working Papers in Economics
Working Paper Series, Center for Fiscal Studies,
Uppsala University, Department of Economics
No 2014:1: Individual Heterogeneity, Nonlinear Budget Sets, and Taxable Income
Sören Blomquist (), Anil Kumar, Che-Yuan Liang () and Whitney K. Newey
Additional contact information
Sören Blomquist: Uppsala Center for Fiscal Studies, Postal: Department of Economics, Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden
Anil Kumar: Dallas Federal Reserve
Che-Yuan Liang: Uppsala Center for Fiscal Studies, Postal: Department of Economics, Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden
Whitney K. Newey: Department of Economics, MIT
Abstract: Given the key role of the taxable income elasticity in designing an optimal tax system there are many studies attempting to estimate this elasticity. A problem with most of these studies is that strong functional form assumptions are used and that heterogeneity in preferences is not allowed for. Building on Blomquist and Newey (2002) we in this paper develop a nonparametric method to estimate expected taxable income as a function of a nonlinear budget set, taking multidimensional heterogeneity and optimization errors fully into account. We reduce the dimensionality of the problem by exploiting structure implied by utility maximization with piecewise linear convex budget sets. We apply the method to Swedish data and estimate for prime age males a significant net of tax elasticity of 0.6 and a significant income elasticity of -0.08.
Keywords: Nonlinear budget sets; nonparametric estimation; additive models; heterogeneous preferences; taxable income
37 pages, February 3, 2014
Full text files
212437_20141_finael.pdf
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