14th journées Louis-André Gérard-Varet

Font Size: 
The Taxable Income Elasticity: A Structural Differencing Approach
Che-Yuan Liang, Anil Kumar

Last modified: 2015-05-06

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 typiclly 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