Working Paper: CEPR ID: DP17612
Authors: Santosh Anagol; Allan Davids; Benjamin Lockwood; Tarun Ramadorai
Abstract: We incorporate a model of frictions into the bunching-based elasticity estimator to rationalize diffuse bunching around kinks and mass above notches in empirical distributions. Model agents draw a sparse set of opportunities from a Poisson process, approximating a broad class of frictions including search costs, inattention, and lumpy adjustment; the predicted density depends on the standard structural elasticity and a money-metric “lumpiness parameter.” We estimate the model using administrative tax data on South African small-businesses, recovering moderate elasticities of taxable income between 0.2 and 0.3 at higher incomes, and larger elasticities at low incomes. Firms appear to treat the bottom kink as a notch, and firms with paid tax practitioners exhibit sharper bunching, driven primarily by lower frictions rather than a higher elasticity.
Keywords: Elasticity of Taxable Income; Tax Sparsity; South Africa; Lumpy Adjustment; Diffuse Bunching; Optimization Frictions; Small Business
JEL Codes: D22; H20; H25; H30; O55
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Frictions (search costs, inattention, lumpy adjustment) (D83) | diffuse bunching of taxable income around tax kinks (H31) |
| Higher frictions (F12) | greater diffuse bunching (F12) |
| Frictions (F16) | underestimation of elasticity of taxable income (H31) |
| Firms with paid tax practitioners (L84) | sharper bunching (D43) |
| Lower frictions (F12) | more precise income targeting (E25) |