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Bias in Tax Progressivity Estimates

Referierte Aufsätze Web of Science

Johannes König

In: National Tax Journal 76 (2023), 2. S. 267-289


Tax progressivity is central in public and political debates when questions of vertical equity are raised. Applied, structural research demands a simple way to capture it. A power function approximation delivers one parameter that captures the residual income elasticity - a summary measure of progressivity. This approximation is accurate, tractable, and interpretable, and hence immensely popular. The most common procedure to estimate this parameter, a log ordinary least squares specification, produces biased and inconsistent estimates. A nonlinear estimator solves this issue and, using different data sets, I find differences in estimates between 6 and 14 percent.

Johannes König

Research Associate in the German Socio-Economic Panel study Department

Topics: Taxes

JEL-Classification: H20;C51;H31
Keywords: Income taxation, progressivity, nonlinear estimation