The Taxable Income Elasticity: A Structural Differencing Approach
Year: 2015
Type: preprint
Abstract: We extend a standard taxable income model with its typical functional-form assumptions to account for nonlinear budget sets. We propose a new method to estimate a taxable income elasticity that is more policy relevant than the typically estimated elasticity based on linearized budget sets. Using U.S. data from the NBER tax panel for 1979-1990 and differencing methods, we estimate an elasticity of 0.75 for taxable income and 0.20 for broad income. These estimates are higher than those obtained by specifications based on linearization. Our approach offers a new way to address the problem of endogenous observed marginal tax rates.
Authors: Rajeev Ranjan Kumar, Che-Yuan Liang
Institutions: Federal Reserve, Uppsala University
Language: English
Topic: Economic and Fiscal Studies
Subfield: Economics and Econometrics
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W3125983042