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

Bruce Chapman and Andrew Leigh

The Economic Record, 2009, vol. 85, issue 270, 276-289

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.

Date: 2009
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https://doi.org/10.1111/j.1475-4932.2009.00554.x

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Working Paper: Do Very High Tax Rates Induce Bunching? Implications for the Design of Income-Contingent Loan Schemes (2006) Downloads
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