Bunching to Maximize Tax Credits: Evidence from Kinks in the U.S. Tax Schedule

Abstract

We document bunching at tax kinks using a panel of 258 million income tax returns in the United States from 1996 to 2014. During this period, bunching grew by 700%. While most bunchers are self-employed, a substantial number of wage earners also bunch by misreporting income. The vast majority of bunching occurs at kinks maximizing tax credits, particularly at the kink that maximizes taxpayer refunds. Many taxpayers follow the refund-maximizing kink from year to year, selectively maximizing the appropriate tax credit(s). We argue that this behavior is incompatible with recently developed methods for identifying elasticities via bunching patterns.