The Bunching Estimator Cannot Identify the Taxable Income Elasticity

Bunching estimators were developed and extended by Saez (2010) and Chetty et. al. (2011). Using this method one can get an estimate of the taxable income elasticity from the bunching pattern around a kink point. The bunching estimator has become popular, with a large number of papers applying the method. In this paper, we show that the bunching estimators cannot identify the taxable income elasticity when the functional form of the distribution of preference heterogeneity is unknown. We find that an observed distribution of taxable income around a kink point or over the whole budget set can be consistent with any positive taxable income elasticity if the distribution of heterogeneity is unrestricted