Better Bunching, Nicer Notching

44 Pages Posted: 23 Mar 2018  

Marinho Bertanha

University of Notre Dame - Department of Economics

Andrew H. McCallum

Federal Reserve Board

Nathan Seegert

University of Utah - Department of Finance

Date Written: March 20, 2018

Abstract

Bunching-type estimators use mass points in an observed distribution to estimate elasticities, such as the elasticity of taxable income with respect to the net-of-tax rate. We clarify the assumptions necessary to identify these elasticities using as a single budget constraint that may contain any number of kinks and notches. Next, we derive the partially identified set for the elasticity and relate bunching estimators to censoring models. The result is an updated method that combines the insights of the bunching-type approach and a depth of knowledge from a vast econometric literature. Our approach results in quantitatively different estimates of the compensated elasticity of taxable income with respect to net-of-tax rate than bunching estimators in both Monte Carlo experiments and the context of the earned income tax credit.

Keywords: bunching, notching, tax kink, earned income tax credit

JEL Classification: H23, H24, H26

Suggested Citation

Bertanha, Marinho and McCallum, Andrew Harrison and Seegert, Nathan, Better Bunching, Nicer Notching (March 20, 2018). Available at SSRN: https://ssrn.com/abstract=3144539 or http://dx.doi.org/10.2139/ssrn.3144539

Marinho Bertanha (Contact Author)

University of Notre Dame - Department of Economics ( email )

Notre Dame, IN 46556
United States

Andrew Harrison McCallum

Federal Reserve Board ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://www.andrewhmccallum.com

Nathan Seegert

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States

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