Given the key role of the taxable income elasticity in designing an optimal tax system there are many studies attempting to estimate this elasticity. A problem with most of these studies is that strong functional form assumptions are used and that heterogeneity in preferences is not allowed for....

We extend a standard taxable income model with its typical functional-form assumptions to account for nonlinear budget sets. We propose a new method to estimate a taxable income elasticity that is more policy relevant than the typically estimated elasticity based on linearized budget sets. Using...