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Title "External Validity in Empirical Public Finance"

In recognition of the central role of the elasticity of taxable income (ETI) in the theory of optimal taxation, many recent attempts have been made to measure it, spanning many countries and time periods. Existing methods have, however, generally not taken into account that the ETI is not a primitive parameter, but rather depends on various aspects of a tax system and the non-tax environment. This raises questions about the external validity of ETI estimates based on data in one country (and period) for the ETI in other countries. We propose a new approach to estimate country-specific ETIs with cross-country panel data, based on the correlated random coefficients model, which explicitly expresses the ETI as a function of structural determinants of the tax system and which generates estimates of the ETI for each country that reflects its innate character. Estimating our model on cross-country panel data and survey data from the International Values Survey (IVS), countries with greater preference for redistribution and trust in government have lower ETIs. Larger countries have lower ETIs. We close by briefly showing how to extrapolate estimated behavioral elasticities to countries that do not levy a particular tax, using wealth taxation as an example.


2023 spring seminar series speaker Dr. Joel Slemrod

Dr. Joel Slemrod