Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/97385
Authors: 
Blomquist, Soren
Kumar, Anil
Liang, Che-Yuan
Newey, Whitney
Year of Publication: 
2014
Series/Report no.: 
cemmap working paper, Centre for Microdata Methods and Practice CWP21/14
Abstract: 
Given the key role of the taxable income elasticity in designing an optimal tax system there are many studies attempting to estimate this elasticity. To account for nonlinear taxes these studies either use instrumental variables approaches that are not fully consistent, or impose strong functional form assumptions. None allow for general heterogeneity in preferences. In this paper we derive the mean and distribution of taxable income, conditional on a nonlinear budget set, allowing general heterogeneity and optimization errors for the mean. We find an important dimension reduction and use that to develop nonparametric estimation methods. We show how to nonparametrically estimate the conditional mean of taxable income imposing all the restrictions of utility maximization and allowing for measurement errors. We apply this method to Swedish data and estimate for prime age males a significant net of tax elasticity of 0.6 and a significant income elasticity of -0.08.
Subjects: 
Nonlinear budget sets
nonparametric estimation
heterogeneous preferences
taxable income
revealed stochastic preference
JEL: 
C14
C24
H31
H34
J22
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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