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Tax Bunching at the Kink in the Presence of Low Capacity of Enforcement: Evidence from Uruguay

Author

Listed:
  • Bergolo, Marcelo

    () (IECON, Universidad de la República)

  • Burdín, Gabriel

    () (Leeds University Business School)

  • De Rosa, Mauricio

    () (Universidad de la República, Uruguay)

  • Giaccobasso, Matias

    () (University of California, Los Angeles)

  • Leites, Martin

    () (Universidad de la República, Uruguay)

Abstract

By using a bunching design on rich administrative tax records from Uruguay's tax agency we explore how individual taxpayers respond to personal income taxation in a context with high sheltering opportunities. We estimate a moderated elasticity of taxable income in the first kink point (0.16) driven by a combination of gross labor income and deductions responses. Taxpayers use personal deductions more intensively close to the kink point and undereport income unilaterally or through employer-employee collusion. Our results suggest that policy efforts should be directed at broadening the tax base and improving the enforcement capacities rather than eroding tax progressivity.

Suggested Citation

  • Bergolo, Marcelo & Burdín, Gabriel & De Rosa, Mauricio & Giaccobasso, Matias & Leites, Martin, 2019. "Tax Bunching at the Kink in the Presence of Low Capacity of Enforcement: Evidence from Uruguay," IZA Discussion Papers 12286, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp12286
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    Keywords

    deductions behavior; elasticity of labor income; tax bunching; personal income taxation; misreporting; developing economies;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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