Estimating the Elasticity of Taxable Labour Income in the Netherlands
Read also the Dutch CPB Policy Brief 2013/04 'Over de top'.
We instrument the endogenous marginal tax rates with synthetic marginal tax rates using projected exogenous income. We control for exogenous income growth by including a number of socioeconomic variables, sector dummies, and log base-year income or a spline in log base-year income. For all workers we find an ETI of 0.24. For workers with high labour income the ETI rises to 0.26 (50-100K) and 0.46 (>50K). The ETI is higher for women than for men. Over all workers, the ETI is only slightly larger than the elasticity of annual hours worked, for high-wage workers the ETI is much larger than the elasticity of annual hours worked.