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Bunching and Adjustment Costs: Evidence from Cypriot Tax Reforms

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  • Mavrokonstantis, Panos
  • Seibold, Arthur

Abstract

We study adjustment costs in behavioral responses to income taxation, exploiting tax reforms that create and subsequently eliminate income tax kinks in Cyprus. Reduced-form evidence reveals substantial adjustment frictions attenuating bunching and de-bunching responses. Combining the empirical bunching moments with a structural model of frictional earnings supply, adjustment costs are estimated between EUR 93 and EUR 238 for wage earners. Moreover, we uncover important asymmetries in adjustment frictions, where bunching at a kink is costlier than de-bunching away from the kink. Finally, we find that self-employed individuals face considerably lower adjustment costs than wage earners.

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  • Mavrokonstantis, Panos & Seibold, Arthur, 2022. "Bunching and Adjustment Costs: Evidence from Cypriot Tax Reforms," Journal of Public Economics, Elsevier, vol. 214(C).
    • Handle: RePEc:eee:pubeco:v:214:y:2022:i:c:s0047272722001293
    DOI: 10.1016/j.jpubeco.2022.104727
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    More about this item

    Keywords

    Income tax; Bunching; Kinks; Optimization frictions;
    All these keywords.

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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