Bunching and Adjustment Costs: Evidence from Cypriot Tax Reforms

Panos Mavrokonstantis and Arthur Seibold

No 9773, CESifo Working Paper Series from CESifo

Abstract: We study adjustment costs in behavioral responses to income taxes, 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 taxation; taxable income responses; bunching; adjustment frictions (search for similar items in EconPapers)
JEL-codes: H24 J22 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-lma, nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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