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Bunching and Non-Bunching at Kink Points of the Swedish Tax Schedule

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  • Spencer Bastani
  • Håkan Selin

Abstract

Recent microeconometric studies of taxpayer’ responsiveness to taxation have shown that intensive margin labor supply and earnings elasticities typically are modest and sometimes equal to zero. However, a common view is that long-run responses might still be large since micro-estimates are downward biased owing to optimization frictions. In this paper we estimate the taxable income elasticity at a very large kink point of the Swedish tax schedule using the bunching method. During the period of study the change in the log net-of-tax rate reached a maximum value of 45.6%. Interestingly, we obtain a precise elasticity estimate of zero for wage earners at this large kink. The size of the kink allows us to derive tighter bounds on the long-run elasticity than previous studies. If wage earners on average tolerate 1% of their disposable income in optimization costs, the upper bound on the long-run taxable income elasticity is 0.39. We also evaluate the performance of the bunching estimator by performing Monte Carlo simulations.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3865.

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Date of creation: 2012
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Handle: RePEc:ces:ceswps:_3865

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Keywords: bunching; taxable income; bounds; optimization frictions;

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References

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  19. Bastani, Spencer & Selin, Håkan, 2011. "Bunching and Non-Bunching at Kink Points of the Swedish Tax schedule," Working Paper Series, Center for Fiscal Studies, Uppsala University, Department of Economics 2011:12, Uppsala University, Department of Economics.
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Citations

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Cited by:
  1. Doerrenberg, Philipp & Duncan, Denvil, 2012. "Experimental Evidence on the Relationship between Tax Evasion Opportunities and Labor Supply," IZA Discussion Papers 6914, Institute for the Study of Labor (IZA).
  2. Jarkko Harju & Tuomas Matikka, 2014. "The Elasticity of Taxable Income and Income-Shifting: What is "Real" and What is Not?," CESifo Working Paper Series 4905, CESifo Group Munich.
  3. Annette Alstadsæter & Martin Jacob, 2013. "Who Participates in Tax Avoidance?," CESifo Working Paper Series 4219, CESifo Group Munich.
  4. Jacob, Martin & Alstadsæter, Annette, 2013. "Payout policies of privately held firms: Flexibility and the role of income taxes," arqus Discussion Papers in Quantitative Tax Research, arqus - Arbeitskreis Quantitative Steuerlehre 152, arqus - Arbeitskreis Quantitative Steuerlehre.
  5. Mazhar Waseem, 2013. "Taxes, Informality and Income Shifting: Evidence from a Recent Pakistani Tax Reform," 2013 Papers, Job Market Papers pwa641, Job Market Papers.
  6. Spencer Bastani & Håkan Selin, 2012. "Bunching and Non-Bunching at Kink Points of the Swedish Tax Schedule," CESifo Working Paper Series 3865, CESifo Group Munich.
  7. le Maire, Daniel & Schjerning, Bertel, 2013. "Tax bunching, income shifting and self-employment," Journal of Public Economics, Elsevier, Elsevier, vol. 107(C), pages 1-18.
  8. Kreiner, Claus Thustrup & Munch, Jakob Roland & Whitta-Jacobson, Hans-Jørgen, 2013. "Taxation and the Long Run Allocation of Labor: Theory and Danish Evidence," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9275, C.E.P.R. Discussion Papers.
  9. Jarkko Harju & Tuomas Matikka, 2013. "The elasticity of taxable income and income-shifting between tax bases: what is “real” and what is not?," Working Papers, Oxford University Centre for Business Taxation 1313, Oxford University Centre for Business Taxation.
  10. Almunia, Miguel & Lopez-Rodriguez, David, 2012. "The efficiency cost of tax enforcement: evidence from a panel of spanish firms," MPRA Paper 44153, University Library of Munich, Germany.
  11. Kanbur, Ravi & Keen, Michael, 2014. "Threshold, Informality, and Partitions of Compliance," Working Papers, Cornell University, Department of Applied Economics and Management 180136, Cornell University, Department of Applied Economics and Management.

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