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How do wage earners respond to a large kink? Evidence on earnings and deduction behavior from Austria

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  • Paetzold, Jörg

    (University of Salzburg)

Abstract

This paper contributes to recent literature emphasizing the importance to identify the different channels along which taxable income responses occur. Using bunching techniques and exploiting a large kink point where marginal tax rates increase by as much as 38 percentage points, I first recover modest gross earnings responses of Austrian employees. Next, I demonstrate that when accounting for deduction behavior, the additional mass of wage earners at the kink increases by around 50%. I show direct evidence for wage earners targeting the kink with their deduction claiming. Finally, I contrast the responses of wage earners with those of self-employed taxpayers, and find that access to different tax adjustment channels corresponds with different adjustment behavior. In sum, my results suggest that distinguishing between earnings and deduction responses matters even for taxpayers with only limited possibilities to shelter taxable income.

Suggested Citation

  • Paetzold, Jörg, 2017. "How do wage earners respond to a large kink? Evidence on earnings and deduction behavior from Austria," Working Papers in Economics 2017-1, University of Salzburg, revised 19 Dec 2017.
    • Handle: RePEc:ris:sbgwpe:2017_001
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    Citations

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    Cited by:

    1. Bergolo, Marcelo & Burdin, 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).
    2. Carina Neisser, 2021. "The Elasticity of Taxable Income: A Meta-Regression Analysis [The top 1% in international and historical perspective]," The Economic Journal, Royal Economic Society, vol. 131(640), pages 3365-3391.
    3. Alinaghi, Nazila & Creedy, John & Gemmell, Norman, 2020. "Do Couples Bunch More? Evidence from Partnered and Single Taxpayers in New Zealand," Working Paper Series 9366, Victoria University of Wellington, Chair in Public Finance.
    4. 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.
    5. Bastani, Spencer & Giebe, Thomas & Miao, Chizheng, 2020. "Ethnicity and tax filing behavior," Journal of Urban Economics, Elsevier, vol. 116(C).
    6. Myhre, Andreas, 2021. "Intensive and Extensive Margin Labor Supply Responses to Kinks in Disability Insurance Programs," MPRA Paper 109547, University Library of Munich, Germany.
    7. Engström, Per & Nordblom, Katarina & Stefansson, Arnaldur, 2018. "Multiple Misbehaving:Loss Averse and Inattentive to Monetary Incentives," Working Papers in Economics 729, University of Gothenburg, Department of Economics.
    8. Rrumbullaku, Oltion, 2021. "Firms behavior around tax thresholds in Albania during the 2015 anti-informality campaign - Bunching features, persistence and growth implications," MPRA Paper 112524, University Library of Munich, Germany.
    9. Simeon Schächtele, 2020. "Tax Responses at Low Taxable Incomes: Evidence from Germany," Fiscal Studies, John Wiley & Sons, vol. 41(2), pages 411-439, June.
    10. Tazhitdinova, Alisa, 2015. "Adjust Me if I Can’t: The Effect of Firm Incentives on Labor Supply Responses to Taxes," MPRA Paper 81611, University Library of Munich, Germany, revised 2017.

    More about this item

    Keywords

    Bunching; earnings elasticity; tax expenditures; deduction behavior; administrative data;
    All these keywords.

    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
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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