Do Very High Tax Rates Induce Bunching? Implications for the Design of Income Contingent Loan Schemes
14 Pages Posted: 8 Oct 2009
Abstract
Under the Higher Education Contribution Scheme graduates face a sharp discontinuity in their taxable incomes. At the first repayment threshold, they are required to pay a percentage of their entire income to reduce their debts. This results in an extremely high effective marginal tax rate. Using a sample of taxpayer returns we 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. The result has important implications for the design of income contingent university loan schemes.
Suggested Citation: Suggested Citation
Chapman, Bruce James and Leigh, Andrew, Do Very High Tax Rates Induce Bunching? Implications for the Design of Income Contingent Loan Schemes. Economic Record, Vol. 85, Issue 3, pp. 276-289, September 2009, Available at SSRN: https://ssrn.com/abstract=1484286 or http://dx.doi.org/10.1111/j.1475-4932.2009.00554.x
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