Identifying the Elasticity of Taxable Income

33 Pages Posted: 1 Mar 2017

See all articles by Sarah Burns

Sarah Burns

Institute for Defense Analyses

James P. Ziliak

University of Kentucky - Department of Economics

Date Written: March 2017

Abstract

We use matched panels from the Current Population Survey along with a grouping instrumental variables estimator to provide new estimates of the elasticity of taxable income. Our identification strategy exploits the fact that federal and state tax reforms over the past three decades have differentially affected cohorts across states and over time. We find that the elasticity is in the range of 0.4–0.55. The implication of our new estimates for tax policy is that the revenue‐maximising tax rate is nearly 30 percentage points lower than that obtained when we use the typical identification strategy in the literature.

Suggested Citation

Burns, Sarah and Ziliak, James P., Identifying the Elasticity of Taxable Income (March 2017). The Economic Journal, Vol. 127, Issue 600, pp. 297-329, 2017, Available at SSRN: https://ssrn.com/abstract=2924899 or http://dx.doi.org/10.1111/ecoj.12299

Sarah Burns (Contact Author)

Institute for Defense Analyses ( email )

James P. Ziliak

University of Kentucky - Department of Economics ( email )

Lexington, KY 40506
United States

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