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Income Share and Difference-in-Difference Estimates

In: The Elasticity of Taxable Income

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Abstract

This chapter explores two alternative methods of estimating the elasticity of taxable income for specified groups. The first method compares income shares before and after a tax reform: an elasticity can be obtained by comparing the income shares of those who were affected by the tax change and those who were not affected. The second method makes use of fiscal drag, which enables a difference-in-difference approach to be applied. This distinguishes `treatment' and `control' groups respectively in terms of individuals who were sufficiently close to an upper income threshold that they moved into a higher tax rate bracket, and those who remained in the same bracket over the period. Estimates are obtained using administrative data collected by the New Zealand Inland Revenue Department. Changes in the timing of income flows for the higher-income recipients are an important response to the announcement of a new higher rate bracket.

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  • ., 2022. "Income Share and Difference-in-Difference Estimates," Chapters, in: The Elasticity of Taxable Income, chapter 7, pages 141-158, Edward Elgar Publishing.
    • Handle: RePEc:elg:eechap:21391_7
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    1. Nicolò Bird & Ganga Tilakaratna & Louise Moreira Daniels & Shilohni Sumanthiran & Élise Chrétien & Krista Alvarenga & Pedro Arruda, 2022. "Public expenditure analysis for social protection in Sri Lanka," Research Report 74, International Policy Centre for Inclusive Growth.

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    Keywords

    Economics and Finance;

    Statistics

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