Working Paper: CEPR ID: DP10833
Authors: Kurt Schmidheiny; Michaela Slotwinski
Abstract: We study behavioral responses to local income taxes exploiting a special tax regime which applies to foreign employees residing in Switzerland. The used institutional setting generates two thresholds through which locally heterogeneous taxation is assigned: An income threshold at 120,000 Swiss francs and a duration threshold at 5 years of stay in Switzerland. We exploit these thresholds by applying a discontinuity in density design and a fuzzy RDD to administrative income data. We find causal evidence for strategic income bunching for wage earners and tax induced intra-national mobility. Several pieces of evidence suggest that individuals have to "learn the tax code" and that knowledge and information transmission through local networks plays a major role in the behavioral response to tax incentives.
Keywords: income bunching; income taxes; regression discontinuity design; tax induced mobility
JEL Codes: H24; H31; J61
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Learning and information acquisition about tax system (H26) | Taxpayer responses (H29) |
| Income threshold crossing at 120,000 Swiss Francs (F29) | Income bunching (D31) |
| Income bunching (D31) | Adjustment of income reporting behavior (H31) |
| Duration of stay after five years (C41) | Relocation decisions (R23) |
| High-tax municipalities (H29) | Increased likelihood of relocation after five years (J62) |
| Low-tax municipalities (H29) | Decreased likelihood of relocation after five years (R23) |