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Do Very High Tax Rates Induce Bunching? Implications for the Design of Income-Contingent Loan Schemes

Author

Listed:
  • Bruce Chapman

    () (CEPR, RSSS, ANU)

  • Andrew Leigh

    () (SPEAR Centre, RSSS, ANU)

Abstract

We test whether very high marginal tax rates affect taxpayer behaviour, using a unique policy. Under the Higher Education Contribution Scheme – an income-related university loans scheme in Australia – former students with a debt face a sharp discontinuity. At the first repayment threshold they are required to repay a percentage of their entire income, resulting in an effective marginal tax rate that could be regarded as being as high as 76,000 percent. We formally model the taxpayer decision, and then use a sample of taxpayer returns provided to us by the tax office to investigate whether taxpayers bunch below the repayment threshold. We find a statistically significant degree of bunching below the threshold, but the effect is economically small. On net, we estimate that both the deadweight cost and the budgetary loss are less than A$1 million per year, a small fraction of the amount annually repaid through the Higher Education Contribution Scheme. The result has an important implication for the design of income contingent loans for higher education, such as those being introduced in the UK for tuition in September 2006. This is that it is possible to design arrangements in which the first income threshold of repayment is apparently high, but which are still able to deliver relatively high revenue streams in the early stages of income contingent policy reform without important tax payment avoidance consequences. Our findings also reinforce earlier research suggesting only minimal bunching around kink points in taxation schedules.

Suggested Citation

  • Bruce Chapman & Andrew Leigh, 2006. "Do Very High Tax Rates Induce Bunching? Implications for the Design of Income-Contingent Loan Schemes," CEPR Discussion Papers 521, Centre for Economic Policy Research, Research School of Economics, Australian National University.
  • Handle: RePEc:auu:dpaper:521
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    File URL: https://www.cbe.anu.edu.au/researchpapers/cepr/DP521.pdf
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    References listed on IDEAS

    as
    1. Braithwaite, Valerie & Ahmed, Eliza, 2005. "A threat to tax morale: The case of Australian higher education policy," Journal of Economic Psychology, Elsevier, vol. 26(4), pages 523-540, August.
    2. Leora Friedberg, 2000. "The Labor Supply Effects of the Social Security Earnings Test," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 48-63, February.
    3. Richard Blundell & Hilary W. Hoynes, 2004. "Has 'In-Work' Benefit Reform Helped the Labor Market?," NBER Chapters,in: Seeking a Premier Economy: The Economic Effects of British Economic Reforms, 1980-2000, pages 411-460 National Bureau of Economic Research, Inc.
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    Citations

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    Cited by:

    1. Bruce Chapman & Tim Higgins, 2009. "Income Contingent Loans for Paid Parental Leave," CEPR Discussion Papers 596, Centre for Economic Policy Research, Research School of Economics, Australian National University.
    2. Blomquist, Sören & Simula, Laurent, 2010. "Marginal Deadweight Loss when the Income Tax is Nonlinear," Working Paper Series 2010:3, Uppsala University, Department of Economics.
    3. Del Rey, Elena & Racionero, María, 2010. "Financing schemes for higher education," European Journal of Political Economy, Elsevier, vol. 26(1), pages 104-113, March.
    4. Bruce Chapman & Mathias Sinning, 2014. "Student loan reforms for German higher education: financing tuition fees," Education Economics, Taylor & Francis Journals, vol. 22(6), pages 569-588, December.
    5. Barr, Nicholas & Chapman, Bruce & Dearden, Lorraine & Dynarski, Susan, 2018. "Reflections on the US College Loans System: Lessons from Australia and England," IZA Discussion Papers 11422, Institute for the Study of Labor (IZA).
    6. Stavrunova, Olena & Yerokhin, Oleg, 2014. "Tax incentives and the demand for private health insurance," Journal of Health Economics, Elsevier, vol. 34(C), pages 121-130.
    7. Chapman, Bruce & Lounkaew, Kiatanantha, 2010. "Income contingent student loans for Thailand: Alternatives compared," Economics of Education Review, Elsevier, vol. 29(5), pages 695-709, October.

    More about this item

    Keywords

    bunching; marginal tax rates; responses to taxation; income-related loans;

    JEL classification:

    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • H52 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Education

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