Panel Estimation of Taxable Income Elasticities with Heterogeneity and Endogenous Budget Sets

This paper introduces an estimator for the average of heterogeneous elasticities of taxable income (ETI), addressing key econometric challenges posed by nonlinear budget sets. Building on an isoelastic utility framework, we derive a linear-in-logs taxable income specification that incorporates the entire budget set while allowing for individual-specific ETI and productivity growth. To account for endogenous budget sets, we employ panel data and estimate individual-specific ridge regressions, constructing a debiased average of ridge coefficients to obtain the average ETI.