Cover of: Estimating the Elasticity of Taxable Income When Earnings Responses Are Sluggish
Trine Engh Vattø

Estimating the Elasticity of Taxable Income When Earnings Responses Are Sluggish

Section: Articles
Volume 76 (2020) / Issue 4, pp. 329-369 (41)
Published 23.11.2020
DOI 10.1628/fa-2020-0012
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  • 10.1628/fa-2020-0012
Summary
Estimates of the elasticity of taxable income (ETI) are conventionally obtained by stacking three-year overlapping differences in the estimation. This means that the ETI estimate is an average of first-, second-, and third-year effects. The present paper suggests that if gradual adjustment can be expected, the analyst should consider estimating the ETI by a dynamic panel data model. When Norwegian income tax return data for wage earners over a 14-year period (1995-2008) are used in the estimation, an ETI estimate of 0.15 is obtained from the dynamic specification, compared to 0.11 by the conventional approach. Importantly, the conventional approach fails to produce a long-term elasticity estimate by increasing the time span of each difference.