Bunching Evidence on Responses to Taxation and Regulation
Sunday, Jan. 6, 2019 10:15 AM - 12:15 PM
- Chair: Benjamin M. Marx, University of Illinois-Urbana-Champaign
Inverse December Fever
AbstractWe analyze the channels through which owners of small firms bunch at kink points in the income tax. We study the adjustments in business activity and their timing of firm-owners in Austria responding to an increase in their tax burden. We find significant bunching at the first kink point of the personal income tax schedule. To separate bunchers from non-bunchers, we employ a modified propensity score matching approach. This allows us to determine the origin in the distribution of bunchers. In addition, we look at adjustment behavior of bunchers at the end of the year. We find for bunchers a significant drop in December sales of 13.6 percent. This decline cannot be explained by intertemporal shifting but is rather due to tax avoidance and / or evasion. Moreover, we document that the observed sharp bunching is only the tip of the iceberg and reveal a fuzzy adjustment around the kink which can be explained by discrete optimization instead of continuous earnings as in the standard model.
Best of the Bunch? An Exploration of New Methods for Estimating Tax Elasticities
AbstractThe elasticity of corporate taxable income is a fundamental parameter that informs policymakers on how firms will respond to taxes and tax incentives. We provide the most comprehensive evidence to date on this elasticity by using administrative data on the population of 2 million C-corporations and report estimates using a wide set of new bunching estimators. The corporate setting is an ideal setting to investigate the advantages and disadvantages of these new estimators because we have a panel of 10 years of data, multiple kinks, and by using variation in net operating losses we can implement a control group method. This variation allows us to compare different methods that require different amounts of variation in the data.
A Kinky Consistency: Experimental Evidence of Behavior Under Linear and Non-Linear Budget Sets
AbstractIndividuals face non-linear incentives in myriad situations including incentives for retirement savings, tax preferences for labor supply, bulk pricing of retail goods, as well as service rates that vary upon usage. How individuals respond to non-linear incentives is an empirical question with important economic consequences in a number of domains. This paper reports the results of a laboratory experiment designed to analyze individual choice in a setting of non-linear incentives characterized by kinked budget sets (i.e. piece-wise linear and convex) and answer questions that are beyond the reach of what market data can reveal. We find that, while choice data in kinked budget sets follows similar patterns of rationality as data from linear budgets, the choices from both settings cannot be explained by a common decision rule. Almost half of the subjects display such coherently arbitrary preferences that are, in turn, associated with significantly lower price-responsiveness when facing non-linear incentives. Finally, we show that this behavioral departure from the rational benchmark has important consequences for the welfare analysis of non-linear pricing schemes and non-linear taxes as well as for policies that advocate the provision of information regarding marginal incentives.
- H2 - Taxation, Subsidies, and Revenue
- H3 - Fiscal Policies and Behavior of Economic Agents