Panel Estimation of Taxable Income Elasticities with Heterogeneity and Endogenous Budget Sets

TL;DR

This paper develops a novel estimator for heterogeneous taxable income elasticities that accounts for nonlinear budget sets and individual heterogeneity, using panel data and ridge regression techniques.

Contribution

It introduces a new estimator for average ETI that incorporates the entire budget set and individual heterogeneity within an isoelastic utility framework.

Findings

Provides a linear-in-logs taxable income specification

Estimates individual-specific ETI and productivity growth

Constructs a debiased average ETI from panel data

Abstract

This paper introduces an estimator for the average of heterogeneous elasticities of taxable income (ETI), addressing key econometric challenges posed by nonlinear budget sets. Building on an isoelastic utility framework, we derive a linear-in-logs taxable income specification that incorporates the entire budget set while allowing for individual-specific ETI and productivity growth. To account for endogenous budget sets, we employ panel data and estimate individual-specific ridge regressions, constructing a debiased average of ridge coefficients to obtain the average ETI.