Individual Heterogeneity, Nonlinear Budget Sets, and Taxable Income

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Many studies have estimated the effect of taxes on taxable income. 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 expected value and distribution of taxable income, conditional on a nonlinear budget set, allowing general heterogeneity and optimization error in taxable income. We find an important dimension reduction and use that to develop nonparametric estimation methods. We show how to nonparametrically estimate the expected value of taxable income imposing all the restrictions of utility maximization and allowing for measurement errors. We characterize what can be learned nonparametrically from kinks about compensated tax effects. We apply our results to Swedish data and estimate for prime age males a significant net of tax elasticity of 0.21 and a significant nonlabor income effect of about -1. The income effect is substantially larger in magnitude than found in other taxable income studies. Terms of use: Documents inJEL-Code: C140, C240, H300, H310, J220.

On Bunching and Identification of the Taxable Income Elasticity

“…Blomquist and Newey (2002) used variation in budget sets to nonparametrically estimate the average labor supply effect of the Swedish tax reform of 1990-1991 for scalar heterogeneity, with optimization errors. Blomquist et al (2015) showed that these results are valid with general heterogeneity and demonstrated how to impose all the restrictions of utility maximization in estimating average labor supply. Manski (2014), and Kline and Tartari (2016) nonparametrically identified and estimated bounds on important effects, without allowing for optimization errors.…”

“…We note that this result allows for general heterogeneity where the dimension of  is unknown. A more general version of this result was given in Blomquist et al (2015) and is now given in the Appendix of this paper. We will use this result to characterize kink probabilities in terms of compensated elasticities.…”

“…as in Blomquist et al (2015). For simplicity we focus here on what can be learned from two budget sets with stable preferences.…”

“…Nonparametric nonidentification of compensated tax effects from a kink was shown and bounds provided in Blomquist et al (2015). There it was shown how the amount of bunching at a kink was determined by both compensated elasticities and heterogeneity.…”

Bunching at the kink: Implications for spending responses to health insurance contracts

“…This is essentially an under-identification problem, which is more formally characterized by Blomquist et al (2015), who emphasize the need for additional moments in the data that would allow us to select among models. The subsequent bunching literature has broadly pursued two main strategies for handling this identification issue.…”