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How do wage earners respond to a large kink? Evidence on earnings and deduction behavior from Austria

Joerg Paetzold ()

No 2017-1, Working Papers in Economics from University of Salzburg

Abstract: This paper contributes to recent literature emphasizing the importance to identify the different channels along which taxable income responses occur. Using bunching techniques and exploiting a large kink point where marginal tax rates increase by as much as 38 percentage points, I first recover modest gross earnings responses of Austrian employees. Next, I demonstrate that when accounting for deduction behavior, the additional mass of wage earners at the kink increases by around 50%. I show direct evidence for wage earners targeting the kink with their deduction claiming. Finally, I contrast the responses of wage earners with those of self-employed taxpayers, and find that access to different tax adjustment channels corresponds with different adjustment behavior. In sum, my results suggest that distinguishing between earnings and deduction responses matters even for taxpayers with only limited possibilities to shelter taxable income.

Keywords: Bunching; earnings elasticity; tax expenditures; deduction behavior; administrative data (search for similar items in EconPapers)
JEL-codes: H21 H24 J22 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2017-01-18, Revised 2017-12-19
New Economics Papers: this item is included in nep-lma and nep-pbe
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