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

Spencer Bastani () and Håkan Selin

No 3865, CESifo Working Paper Series from CESifo Group Munich

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 (search for similar items in EconPapers)
JEL-codes: H21 H24 J22 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc, nep-pbe and nep-pub
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13) Track citations by RSS feed

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Related works:
Journal Article: Bunching and non-bunching at kink points of the Swedish tax schedule (2014) Downloads
Working Paper: Bunching and Non-Bunching at Kink Points of the Swedish Tax schedule (2011) Downloads
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