Bunching and Non-Bunching at Kink Points of the Swedish Tax Schedule

35 Pages Posted: 6 Jul 2012

See all articles by Spencer Bastani

Spencer Bastani

IFAU - Institute for Labour Market Policy Evaluation; Uppsala University - Department of Economics; Research Institute of Industrial Economics (IFN); Uppsala University - Uppsala Center for Fiscal Studies; Uppsala Center for Labor Studies and Department of Economics

Hakan Selin

Uppsala University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: June 29, 2012

Abstract

Recent microeconometric studies of taxpayer’ responsiveness to taxation have shown that intensive margin labor supply and earnings elasticities typically are modest and sometimes equal to zero. However, a common view is that long-run responses might still be large since micro-estimates are downward biased owing to optimization frictions. In this paper we 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. The size of the kink allows us to derive tighter bounds on the long-run elasticity than previous studies. If wage earners on average tolerate 1% of their disposable income in optimization costs, the upper bound on the long-run taxable income elasticity is 0.39. We also evaluate the performance of the bunching estimator by performing Monte Carlo simulations.

Keywords: bunching, taxable income, bounds, optimization frictions

JEL Classification: H210, H240, J220

Suggested Citation

Bastani, Spencer and Selin, Hakan, Bunching and Non-Bunching at Kink Points of the Swedish Tax Schedule (June 29, 2012). CESifo Working Paper Series No. 3865, Available at SSRN: https://ssrn.com/abstract=2101038 or http://dx.doi.org/10.2139/ssrn.2101038

Spencer Bastani

IFAU - Institute for Labour Market Policy Evaluation ( email )

Box 513
751 20 Uppsala
Sweden

Uppsala University - Department of Economics ( email )

Box 513
SE-75120 Uppsala
Sweden

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Uppsala University - Uppsala Center for Fiscal Studies ( email )

Box 513
Uppsala, 751 20
Sweden

Uppsala Center for Labor Studies and Department of Economics ( email )

Hakan Selin (Contact Author)

Uppsala University - Department of Economics ( email )

Box 513
SE-75120 Uppsala
Sweden

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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