Errors–In–Variables and Estimated Income and Price Elasticities of Charitable Giving

Researchers often rely on self–reported tax data to gauge the effect of taxes on economic activity. These data, however, are subject to measurement errors in the presence of tax evasion. We find evidence that estimated income and tax price elasticities are biased due to errors–in variables in self–reported tax data. We propose a method to diagnose whether the estimates are subject to measurement error bias and describe a methodology employing Two–Stage Least Squares to obtain consistent estimates.