Discussion Papers no. 926
Estimating the elasticity of taxable income when earnings responses are sluggish
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.
About the publication
- Title
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Estimating the elasticity of taxable income when earnings responses are sluggish
- Author
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Trine Engh Vattø
- Series and number
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Discussion Papers no. 926
- Publisher
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Statistisk sentralbyrå
- Topic
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Discussion Papers
- ISSN
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1892-753X
- About Discussion Papers
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Discussion papers comprise research papers intended for international journals and books. A preprint of a Discussion Paper may be longer and more elaborate than a standard journal article as it may include intermediate calculations, background material etc.
Contact
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Statistics Norway's Information Centre