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Frictions and taxpayer responses: evidence from bunching at personal tax thresholds

Stuart Adam (), James Browne, David Phillips () and Barra Roantree ()
Additional contact information
Stuart Adam: Institute for Fiscal Studies and Institute for Fiscal Studies
David Phillips: Institute for Fiscal Studies and Institute for Fiscal Studies

No W17/14, IFS Working Papers from Institute for Fiscal Studies

Abstract: We exploit kinks and notches in the UK personal tax schedule over a 40-year period to investigate how taxpayers respond to income tax and social security contributions. At kinks, where the marginal rate rises, we ?nd bunching by company owner-managers and the self-employed, but not those with only employment income. Responses to notches, where the average rate rises, provide compelling evidence that this is because most employees face substantial frictions: fewer than a quarter bunch even where doing so would increase both consumption and leisure. We develop a new approach for identifying selection in who responds and for decomposing responses into hours and wage components. We ?nd that those employees who do bunch at notches are almost exclusively part-time workers, but tend to have lower wages and work more hours than those part-time workers who do not bunch. This page was updated 29/08/2019.

Keywords: Behavioural response; income tax; social security con- tributions; optimisation frictions; elasticity of taxable income (search for similar items in EconPapers)
JEL-codes: H20 H24 J22 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eur, nep-pbe and nep-pub
Date: 2017-08-22
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