Discussion Papers no. 926

Estimating the elasticity of taxable income when earnings responses are sluggish

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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

Estimating the elasticity of taxable income when earnings responses are sluggish

Author

Trine Engh Vattø

Series and number

Discussion Papers no. 926

Publisher

Statistisk sentralbyrå

Topic

Discussion Papers

ISSN

1892-753X

Number of pages

45

About Discussion Papers

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.

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