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

Document type
Working Paper
Author(s)
Adam, Stuart; Browne, James; Phillips, David
Publisher
Institute for Fiscal Studies
Date of publication
22 August 2017
Series
IFS Working Paper; W17/14
Subject(s)
Poverty Alleviation Welfare Benefits and Financial Inclusion, Social Policy
Collection
Social welfare
Material type
Reports

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This paper investigates bunching at personal tax thresholds in the UK over a 40-year period. At kinks, where the marginal tax rate rises, it finds bunching among company owner-managers and the self-employed, but not those with only employment income. 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 consumption and leisure. This new approach identifies selection for decomposing responses into hours and wage components. This paper finds that employees who bunch at notches are higher-hours, lower-wage, part-time workers.

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