Bunching and Adjustment Costs: Evidence from Cypriot Tax Reforms

Panos Mavrokonstantis and Arthur Seibold

Journal of Public Economics, 2022, vol. 214, issue C

Abstract: We study adjustment costs in behavioral responses to income taxation, exploiting tax reforms that create and subsequently eliminate income tax kinks in Cyprus. Reduced-form evidence reveals substantial adjustment frictions attenuating bunching and de-bunching responses. Combining the empirical bunching moments with a structural model of frictional earnings supply, adjustment costs are estimated between EUR 93 and EUR 238 for wage earners. Moreover, we uncover important asymmetries in adjustment frictions, where bunching at a kink is costlier than de-bunching away from the kink. Finally, we find that self-employed individuals face considerably lower adjustment costs than wage earners.

Keywords: Income tax; Bunching; Kinks; Optimization frictions (search for similar items in EconPapers)
JEL-codes: H24 J22 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pubeco:v:214:y:2022:i:c:s0047272722001293

DOI: 10.1016/j.jpubeco.2022.104727

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