A panel-data estimator for the average of individual-specific elasticities of taxable income (ETI) when budget sets are nonlinear and endogenous. Starting from an isoelastic utility model, the authors derive a linear-in-logs taxable-income equation that embeds the whole budget set and permits person-specific ETI and productivity growth. They fit an individual-specific ridge regression for each person and form a debiased average of the ridge coefficients, correcting the shrinkage bias to recover the average ETI. Applied to Panel Study of Income Dynamics data for 1977-1997 it yields an average ETI of about 0.605.
Introduces a panel-data estimator for the average of heterogeneous elasticities of taxable income (ETI) when tax-induced budget sets are nonlinear and endogenous. Starting from an isoelastic utility …