Estimating taxable income responses using the Norwegian tax reform in 2006

Abstract

In this paper, we will examine the Norwegian tax reform from 2006, which included a decrease in overall marginal taxes. By using the approach of Gruber & Saez (2002), we will provide new estimates of the elasticity of taxable income (ETI), regarding this reform. We collected data from Statistics Norway, through Microdata, and discuss how the reform impacted an individuals’ labour supply choices. Our results from running 2SLS indicate that the elasticity of taxable income of the tax reform in 2006 is small, compared to other international studies. By using a placebo analysis, we implement a series of fabricated tax reforms to test the robustness of the regression models. The findings of this analysis are that we get a systematic bias when applying a placebo reform.