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Frictions and taxpayer responses: evidence from bunching at personal tax thresholds

Author

Listed:
  • Stuart Adam

    (Institute for Fiscal Studies (IFS))

  • James Browne

    (Tony Blair Institute for Global Change (TBI))

  • David Phillips

    (Institute for Fiscal Studies (IFS))

  • Barra Roantree

    (Economic and Social Research Institute (ESRI) and Trinity College Dublin (TCD))

Abstract

We exploit kinks and notches in the UK personal tax schedule over a 40-year period to investigate how taxpayers respond to income tax and social security contributions. At kinks, where the marginal rate rises, we find bunching by company owner-managers and the self-employed, but not those with only employment income. Responses to notches, where the average rate rises, provide compelling evidence that this is because most employees face substantial frictions: fewer than a quarter bunch even where doing so would increase both consumption and leisure. We develop a new approach for identifying selection in who responds and for decomposing responses into hours and wage components. We find that those employees who do bunch at notches are almost exclusively part-time workers, but tend to have lower wages and work more hours than those part-time workers who do not bunch.

Suggested Citation

  • Stuart Adam & James Browne & David Phillips & Barra Roantree, 2021. "Frictions and taxpayer responses: evidence from bunching at personal tax thresholds," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(3), pages 612-653, June.
  • Handle: RePEc:kap:itaxpf:v:28:y:2021:i:3:d:10.1007_s10797-020-09619-0
    DOI: 10.1007/s10797-020-09619-0
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    Cited by:

    1. Stuart Adam & Helen Miller, 2019. "Principles and practice of taxing small business," IFS Working Papers W19/31, Institute for Fiscal Studies.
    2. Hargaden, Enda Patrick, 2020. "Taxpayer responses in good times and bad," Journal of Economic Behavior & Organization, Elsevier, vol. 176(C), pages 653-690.
    3. Adam, Stuart & Phillips, David & Roantree, Barra, 2019. "35 years of reforms: A panel analysis of the incidence of, and employee and employer responses to, social security contributions in the UK," Journal of Public Economics, Elsevier, vol. 171(C), pages 29-50.
    4. Francesco Alosa, 2023. "Estimating the Elasticity of Turnover from Bunching: Preferential Tax Regimes for Solo Self-employed in Italy," Working Papers wp1186, Dipartimento Scienze Economiche, Universita' di Bologna.
    5. Felix J. Bierbrauer & Pierre C. Boyer & Andreas Peichl, 2021. "Politically Feasible Reforms of Nonlinear Tax Systems," American Economic Review, American Economic Association, vol. 111(1), pages 153-191, January.
    6. Spencer Bastani & Daniel Waldenström, 2020. "The Ability Gradient in Bunching," CESifo Working Paper Series 8233, CESifo.
    7. James Browne & David Phillips, 2017. "Estimating the size and nature of responses to changes in income tax rates on top incomes in the UK: a panel analysis," IFS Working Papers W17/13, Institute for Fiscal Studies.
    8. Roantree, Barra & Doorley, Karina & Kakoulidou, Theano & O'Malley, Seamus, 2021. "Budget 2022," Quarterly Economic Commentary: Special Articles, Economic and Social Research Institute (ESRI).
    9. Helen Miller & Thomas Pope & Kate Smith, 2024. "Intertemporal Income Shifting and the Taxation of Business Owner-Managers," The Review of Economics and Statistics, MIT Press, vol. 106(1), pages 184-201, January.
    10. McQuinn, Kieran & O'Toole, Conor & Coffey, Cathal & Wendy Disch & Eva Shiel & Eoin Kenny, 2021. "Quarterly Economic Commentary, Winter 2021," Forecasting Report, Economic and Social Research Institute (ESRI), number QEC2021WIN, September.
    11. Nicole Bosch & Egbert Jongen & Wouter Leenders & Jan Möhlmann, 2019. "Non-Bunching at Kinks and Notches in Cash Transfers," CPB Discussion Paper 401, CPB Netherlands Bureau for Economic Policy Analysis.
    12. Roantree, Barra & Kakoulidou, Theoni, 2021. "Options for raising tax revenue in Ireland," Papers BP2022/1, Economic and Social Research Institute (ESRI).
    13. Gerth, Florian & Temnov, Grigory, 2021. "New Ways of Modeling Loan-to-Income Distributions and their Evolution in Time - A Probability Copula Approach," International Review of Economics & Finance, Elsevier, vol. 71(C), pages 217-236.
    14. Nicole Bosch & Egbert Jongen & Wouter Leenders & Jan Möhlmann, 2019. "Non-bunching at kinks and notches in cash transfers in the Netherlands," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 26(6), pages 1329-1352, December.
    15. Nicole Bosch & Egbert Jongen & Wouter Leenders & Jan Möhlmann, 2019. "Non-Bunching at Kinks and Notches in Cash Transfers," CPB Discussion Paper 401.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    16. Jack W. Britton & Jonathan Gruber, 2019. "Do Income Contingent Student Loan Programs Distort Earnings? Evidence from the UK," NBER Working Papers 25822, National Bureau of Economic Research, Inc.
    17. Tazhitdinova, Alisa, 2020. "Do only tax incentives matter? Labor supply and demand responses to an unusually large and salient tax break," Journal of Public Economics, Elsevier, vol. 184(C).
    18. Laurence O'Brien, 2023. "The effect of tax incentives on private pension saving," IFS Working Papers W23/10, Institute for Fiscal Studies.

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    More about this item

    Keywords

    Behavioural response; Income tax; Social security contributions; Optimisation frictions; Elasticity of taxable income; Bunching;
    All these keywords.

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • 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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