Abstract
The elasticity of taxable income (ETI) parameter is a key quantity in empirical analysis of tax policy and labor supply. We examine when a commonly applied class of ETI estimands can be used to learn about individuals’ ETI parameters and their (un)compensated elasticities of labor supply. We begin by providing necessary and sufficient conditions for these estimands to be given a causal interpretation as a positively weighted average of heterogeneous ETI parameters. We then apply these results to empirically analyze a reform of the Norwegian tax system that reduced the marginal tax rates on middle and high incomes. The estimated ETI parameters increase steadily with income, meaning high-income individuals are more responsive to tax changes than middle-income individuals. Next, we show how (un)compensated elasticities of labor supply can be bounded directly from the ETI estimands, or point identified by combining these estimands with estimates of earnings responses to lottery winnings. The results suggest an (un)compensated elasticity of 0.15 (0.0) for middle-income individuals. The (un)compensated elasticity estimates increase steadily with income to around 0.5 (0.35) for high-income individuals. These findings imply a substantial excess burden of taxation, and that reducing the top-income tax rate would increase tax revenue. Under separable utility, our findings are also informative about how the intertemporal elasticity of substitution and the Frisch elasticity vary across the income distribution
The seminar will be held in room 1249 (12th floor) at Eilert Sundts Hus. The address is Moltke Moes vei 31.