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| Allan Seuri |
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| ''Estimating tax income elasticities using a group-averaged synthetic tax instrument'' |
| ( 2019, Vol. 39 No.3 ) |
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| A common approach to estimating the elasticity of income to taxation is to construct an instrumental variable using synthetic tax rates. Individual-level income dynamics threaten the validity of this instrument, but this problem can potentially be mitigated by group-averaging the instrument. In this article I show that rather than imposing an arbitrary minimum threshold for group sizes to avoid small-sample bias, researchers should use leave-one-out group averages. Using CPS data I show that this correction increases the estimate for broad income elasticity. |
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| Keywords: instrumental variables, elasticity of taxable income, grouping estimation, leave-one-out |
JEL: H2 - Taxation, Subsidies, and Revenue: General
H3 - Fiscal Policies and Behavior of Economic Agents: General |
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| Manuscript Received : Apr 22 2019 | | Manuscript Accepted : Sep 30 2019 |
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