Elasticities of taxable income and adjustment costs: bunching evidence from New Zealand

Abstract

Abstract This article obtains elasticity of taxable income (ETI) estimates using data for NZ over the period, 2001–2017, and using the connection between the ETI and excess bunching at income tax thresholds. Results are reported for the top two thresholds in the tax schedule and for various taxpayer types. Adjustments to tax changes are investigated by comparing ETIs obtained from persistent bunching at thresholds when the tax regime is unchanged, with transitory values associated with specific tax reforms. Results suggest substantial bunching around both tax kinks, with ETIs of around 0.2–0.3 across all taxpayers. Evidence suggests large responses by the self-employed, with ETIs of around 0.8–1.0. No significant differences between males and females were found. Adjustment costs and/or inattention biases associated with a shift in a tax threshold were equivalent initially to around 18% (declining to 6%) of the observed excess mass at the post-reform threshold.