Do Taxpayers Bunch at Kink Points?

Abstract

This paper investigates whether taxpayers bunch at the kink points of the US income tax schedule (i.e. where marginal rates jump) using tax returns data. Clear evidence of bunching is found only at the first kink point (where marginal rates jump from 0 to 15%). Evidence for other kink points is weak or null. Evidence of bunching is stronger for itemizers than for non-itemizers. Theoretical models of behavioral responses to taxation show that bunching is proportional to the compensated elasticity of income with respect to tax rates. These models are used to perform simulations of bunching and calibrate the key parameters (the behavioral elasticity and the extent to which taxpayers control their income) to the empirical income distributions. Except for low income earners, the behavioral elasticity consistent with the empirical results is small.