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

14 Pages Posted: 8 Oct 2009

See all articles by Bruce Chapman

Bruce Chapman

Australian National University, Research School of Social Sciences (RSSS) - Economics Program; Australian National University (ANU) - Crawford School of Public Policy

Andrew Leigh

Australian House of Representatives Parliament House; Centre for Applied Macroeconomic Analysis, ANU; IZA

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

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

Bruce James Chapman

Australian National University, Research School of Social Sciences (RSSS) - Economics Program ( email )

HC Coombs Building
Australian National University
Canberra, Australian Capital Territory 0200
Australia

Australian National University (ANU) - Crawford School of Public Policy

ANU College of Asia and the Pacific
J.G. Crawford Building, #132, Lennox Crossing
Canberra, Australian Capital Territory 0200
Australia

Andrew Leigh

Australian House of Representatives Parliament House ( email )

Canberra, 2600
Australia

Centre for Applied Macroeconomic Analysis, ANU ( email )

ANU College of Business and Economics
Canberra, Australian Capital Territory 0200
Australia

IZA ( email )

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