Revisiting the estimation of the elasticity of taxable income
Obtaining credible estimates of the ETI is therefore important both in the academic literature and in actual policy making. Yet, the literature following Feldstein (1995) has identified as may new challenges as it has resolved, and while most modern empirical studies in public and labor economics put great weight on validating identifying assumptions – e.g. common pre-trends in Difference-in-Difference (DiD) estimations – studies of taxable income responses using tax reforms struggle to follow suit. In this project, we aim at bringing the modern empirical methods into the ETI literature. At its core this literature aims at using the changes in marginal tax rates created by tax reforms to identify behav-ioral responses to taxation. However, this estimation strategy is complicated by the fact that tax re-forms are not random, and the changes in marginal tax rates therefore risk being correlated with other factors leading to biased results.