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Federal Reserve Bank of Dallas
Working Papers
Estimating Taxable Income Responses with Elasticity Heterogeneity
Anil Kumar
Che-Yuan Liang

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.

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Anil Kumar & Che-Yuan Liang, Estimating Taxable Income Responses with Elasticity Heterogeneity, Federal Reserve Bank of Dallas, Working Papers 1611, 01 Nov 2016, revised 02 Mar 2018.
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Note: The original version of the paper circulated as “The Taxable Income Elasticity: A Structural Differencing Approach."
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Keywords: taxable income; nonlinear budget sets; panel data
DOI: 10.24149/wp1611r2
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