Estimating Taxable Income Responses with Elasticity Heterogeneity

22 Pages Posted: 10 Nov 2016 Last revised: 29 Apr 2020

See all articles by Anil Kumar

Anil Kumar

Federal Reserve Bank of Dallas - Research Department

Che-Yuan Liang

Uppsala University - Department of Economics

Date Written: 2016-11-01

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 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.

Keywords: taxable income, nonlinear budget sets, panel data

JEL Classification: D11, H24, J22

Suggested Citation

Kumar, Anil and Liang, Che-Yuan, Estimating Taxable Income Responses with Elasticity Heterogeneity (2016-11-01). FRB of Dallas Working Paper No. 1611, Available at SSRN: https://ssrn.com/abstract=2866846 or http://dx.doi.org/10.24149/wp1611r2

Anil Kumar (Contact Author)

Federal Reserve Bank of Dallas - Research Department ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

Che-Yuan Liang

Uppsala University - Department of Economics ( email )

Box 513
SE-75120 Uppsala
Sweden

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