Abstract
Reliable estimates of how tax incentives affect behavior are an essential input into the formation of tax policy. However, one encounters a number of difficult econometric problems in estimating the magnitude of the behavioral effects. This paper provides a nontechnical introduction to some of the more prominent problems, particularly the endogeneity of marginal tax rates and the problem of identifying tax effects, and discusses two estimation techniques used in recent studies: difference-in-differences and instrumental variables using panel data.
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