Working Paper: NBER ID: w28826
Authors: Daniel M. Hungerman
Abstract: A recent literature has studied bunching at notches in tax systems; but work on the implications of bunching for welfare has been limited. We consider a setting where there are discrete changes in the enforcement of tax compliance at certain levels of reported income, creating notches that can lead to bunching. We find that greater levels of bunching can be associated with greater tax efficiency. A simulation exercise demonstrates that notches with greater bunching can be associated with higher welfare than notches with less bunching, and that a tax system with bunching at a notch can generate higher overall social welfare than a revenue-equivalent no-evasion linear tax.
Keywords: Tax Evasion; Tax Compliance; Bunching; Welfare Economics
JEL Codes: H21; H26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Greater bunching at enforcement notches (D30) | Greater tax efficiency (H21) |
| Greater bunching at enforcement notches (D30) | Higher overall social welfare (D69) |
| Tax enforcement notches (H26) | Changes in taxpayer behavior (H26) |
| Changes in taxpayer behavior (H26) | Impact on welfare (I38) |
| Tax system with notches (H29) | Higher social welfare than linear tax without evasion (H21) |