Estimating the Elasticity of Taxable Income when Earnings Responses are Sluggish

Download or read book Estimating the Elasticity of Taxable Income when Earnings Responses are Sluggish written by Trine Engh Vattø and published by . This book was released on 2020 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Estimates of the elasticity of taxable income (ETI) is conventionally obtained by "stacking" three-year overlapping differences in the estimation. In effect, this means that the ETI estimate is an average of first-, second-, and third-year effects. The present paper draws attention to this implication and suggests that if there is gradual adjustment the analyst should rather estimate the ETI by a dynamic panel data model. When using Norwegian income tax return data for wage earners over a 14-year period (1995-2008) in the estimation, an ETI estimate of 0.15 is obtained from the dynamic specification, compared to 0.11 for the conventional approach. Importantly, the conventional approach fails to render a long-term elasticity estimate by increasing the time span of each difference.