Institutional Affiliation: Uppsala Center for Fiscal Studies, Department of Economics, Uppsala Un
|On Bunching and Identification of the Taxable Income Elasticity|
with , , : w24136
The taxable income elasticity is a key parameter for predicting the effect of tax reform or designing an income tax. Bunching at kinks and notches in a single budget set have been used to estimate the taxable income elasticity. We show that when the heterogeneity distribution is unrestricted the amount of bunching at a kink or a notch is not informative about the size of the taxable income elasticity, and neither is the entire distribution of taxable income for a convex budget set. Kinks do provide information about the size of the elasticity when a priori restrictions are placed on the heterogeneity distribution. They can identify the elasticity when the heterogeneity distribution is specified across the kink and provide bounds under restrictions on the heterogeneity distribution. We also...