On Bunching and Identification of the Taxable Income Elasticity

44 Pages Posted: 28 Dec 2017

See all articles by Soren Blomquist

Soren Blomquist

Uppsala University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Whitney K. Newey

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Anil Kumar

Federal Reserve Bank of Dallas - Research Department

Che-Yuan Liang

Uppsala University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: December 2017

Abstract

The taxable income elasticity is a key parameter for predicting the effect of tax reform or designing an income tax. Bunching at kinks and notches in a single budget set have been used to estimate the taxable income elasticity. We show that when the heterogeneity distribution is unrestricted the amount of bunching at a kink or a notch is not informative about the size of the taxable income elasticity, and neither is the entire distribution of taxable income for a convex budget set. Kinks do provide information about the size of the elasticity when a priori restrictions are placed on the heterogeneity distribution. They can identify the elasticity when the heterogeneity distribution is specified across the kink and provide bounds under restrictions on the heterogeneity distribution. We also show that variation in budget sets can identify the taxable income elasticity when the distribution of preferences is unrestricted and stable across budget sets. For nonparametric utility with general heterogeneity we show that kinks only provide elasticity information about individuals at the kink and we give bounds analogous to those for isoelastic utility. Identification becomes more difficult with optimization errors We show in examples how results are affected by optimization errors.

Suggested Citation

Blomquist, Soren and Newey, Whitney K. and Kumar, Anil and Liang, Che-Yuan, On Bunching and Identification of the Taxable Income Elasticity (December 2017). NBER Working Paper No. w24136, Available at SSRN: https://ssrn.com/abstract=3092984

Soren Blomquist (Contact Author)

Uppsala University - Department of Economics ( email )

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CESifo (Center for Economic Studies and Ifo Institute)

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Whitney K. Newey

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Anil Kumar

Federal Reserve Bank of Dallas - Research Department ( email )

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Che-Yuan Liang

Uppsala University - Department of Economics ( email )

Box 513
SE-75120 Uppsala
Sweden

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