The Bunching Estimator Cannot Identify the Taxable Income Elasticity

Sören Blomquist, Whitney Newey

NBER Working Paper No. 24136
Issued in December 2017
NBER Program(s):Labor Studies, Public Economics

Bunching estimators were developed and extended by Saez (2010) and Chetty et. al. (2011). Using this method one can get an estimate of the taxable income elasticity from the bunching pattern around a kink point. The bunching estimator has become popular, with a large number of papers applying the method. In this paper, we show that the bunching estimators cannot identify the taxable income elasticity when the functional form of the distribution of preference heterogeneity is unknown. We find that an observed distribution of taxable income around a kink point or over the whole budget set can be consistent with any positive taxable income elasticity if the distribution of heterogeneity is unrestricted.

If one is willing to assume restrictions on the heterogeneity density some information about the taxable income elasticity can be obtained. We give bounds on the taxable income elasticity based on monotonicity of the heterogeneity density and apply these bounds in an example.

We also consider identification from budget set variation. We find that kinks alone may not be informative even when budget sets vary but the taxable income elasticity can be well identified from variation of budget sets. The key condition for identification from two convex budget sets is that for some individual the tax rate at the chosen point is different for the two budget sets.

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Document Object Identifier (DOI): 10.3386/w24136

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