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Bunching and non-bunching at kink points of the Swedish tax schedule
Uppsala University, Disciplinary Domain of Humanities and Social Sciences, Faculty of Social Sciences, Department of Economics.
Uppsala University, Units outside the University, Office of Labour Market Policy Evaluation.
2014 (English)In: Journal of Public Economics, ISSN 0047-2727, E-ISSN 1879-2316, Vol. 109, 36-49 p.Article in journal (Refereed) Published
Abstract [en]

Recent microeconometric studies of taxpayers' responsiveness to taxation have shown that intensive margin labor supply and earnings elasticities typically are modest and sometimes equal to zero. A common view is that long-run responses still might be large if micro-estimates are downward biased owing to optimization frictions. In this paperwe estimate the taxable income elasticity at a very large kink point of the Swedish tax schedule using the bunching method. During the period of study the change in the log net-of-tax rate reached a maximum value of 45.6%. Interestingly, we obtain a precise elasticity estimate of zero for wage earners at this large kink. We also conclude by the means of numerical simulations that, even though the kink point we study is very large, income effects are unlikely to bias our estimates. The size of the kink allows us to derive tighter bounds on the long-run elasticity than previous studies. Ifwage earners on average tolerate 1% of their disposable income in optimization costs, the upper bound on the long-run compensated taxable income elasticity is 0.39.

Place, publisher, year, edition, pages
2014. Vol. 109, 36-49 p.
Keyword [en]
Bunching;Taxable income;Bounds; Optimization frictions; Income effects
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Research subject
URN: urn:nbn:se:uu:diva-216880DOI: 10.1016/j.jpubeco.2013.09.010ISI: 000329953400004OAI: oai:DiVA.org:uu-216880DiVA: diva2:691247
Available from: 2014-01-27 Created: 2014-01-27 Last updated: 2014-02-20Bibliographically approved

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Publisher's full texthttp://web.econ.ku.dk/eprn_epru/Seminar/Bastani_Selin_20120203.pdf

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Bastani, SpencerSelin, Håkan
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