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The Importance of Deductions in Response to the Personal Income Tax: Bunching Evidence from Germany

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  • Schächtele, Simeon

Abstract

For its promise to summarize all necessary information to calculate efficiency losses from taxation (Feldstein, 1999), the elasticity of taxable income (ETI) has become one of the most widely studied parameters in public economics. More recently, Chetty (2009) and others have pointed out the limits of the sufficiency property of the ETI and reemphasized the importance of separating the behavioral margins along which taxpayers react. Using German tax administration data from 2007, this paper documents bunching patterns that are consistent with deduction behavior playing a key role in response to the personal income tax. Because the set of available deductions and the strength of enforcing their proper use are policy choices, this result cautions against construing the ETI as a structural parameter that determines optimal tax rates independently of non-tax rate policy instruments. For reference, I also report estimates for the local ETI at the personal allowance threshold from applying Saez' (2010) bunching estimator.

Suggested Citation

  • Schächtele, Simeon, 2016. "The Importance of Deductions in Response to the Personal Income Tax: Bunching Evidence from Germany," VfS Annual Conference 2016 (Augsburg): Demographic Change 145748, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc16:145748
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    References listed on IDEAS

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    1. Raj Chetty, 2009. "Is the Taxable Income Elasticity Sufficient to Calculate Deadweight Loss? The Implications of Evasion and Avoidance," American Economic Journal: Economic Policy, American Economic Association, vol. 1(2), pages 31-52, August.
    2. Philipp Doerrenberg & Andreas Peichl & Sebastian Siegloch, 2017. "The Elasticity of Taxable Income in the Presence of Deduction Possibilities," NBER Chapters, in: Personal Income Taxation and Household Behavior (TAPES), National Bureau of Economic Research, Inc.
    3. Gruber, Jon & Saez, Emmanuel, 2002. "The elasticity of taxable income: evidence and implications," Journal of Public Economics, Elsevier, vol. 84(1), pages 1-32, April.
    4. Raj Chetty & John N. Friedman & Tore Olsen & Luigi Pistaferri, 2011. "Adjustment Costs, Firm Responses, and Micro vs. Macro Labor Supply Elasticities: Evidence from Danish Tax Records," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 126(2), pages 749-804.
    5. Alexander M. Gelber & Damon Jones & Daniel W. Sacks, 2013. "Earnings Adjustment Frictions: Evidence From Social Security Earnings Test," Working Papers 13-50, Center for Economic Studies, U.S. Census Bureau.
    6. Slemrod, Joel, 1998. "Methodological Issues in Measuring and Interpreting Taxable Income Elasticities," National Tax Journal, National Tax Association, vol. 51(n. 4), pages 773-88, December.
    7. Bastani, Spencer & Selin, Håkan, 2014. "Bunching and non-bunching at kink points of the Swedish tax schedule," Journal of Public Economics, Elsevier, vol. 109(C), pages 36-49.
    8. Emmanuel Saez, 2010. "Do Taxpayers Bunch at Kink Points?," American Economic Journal: Economic Policy, American Economic Association, vol. 2(3), pages 180-212, August.
    9. Doerrenberg, Philipp & Peichl, Andreas & Siegloch, Sebastian, 2014. "Sufficient Statistic or Not? The Elasticity of Taxable Income in the Presence of Deduction Possibilities," IZA Discussion Papers 8554, Institute of Labor Economics (IZA).
    10. Kopczuk, Wojciech, 2005. "Tax bases, tax rates and the elasticity of reported income," Journal of Public Economics, Elsevier, vol. 89(11-12), pages 2093-2119, December.
    11. Martin Feldstein, 1999. "Tax Avoidance And The Deadweight Loss Of The Income Tax," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 674-680, November.
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    13. Henrik J. Kleven & Mazhar Waseem, 2013. "Using Notches to Uncover Optimization Frictions and Structural Elasticities: Theory and Evidence from Pakistan," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 128(2), pages 669-723.
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    Cited by:

    1. Bergolo, Marcelo & Burdin, Gabriel & De Rosa, Mauricio & Giaccobasso, Matias & Leites, Martin, 2019. "Tax Bunching at the Kink in the Presence of Low Capacity of Enforcement: Evidence from Uruguay," IZA Discussion Papers 12286, Institute of Labor Economics (IZA).

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    More about this item

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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