Do Taxpayers Bunch at Kink Points ?

This paper uses individual tax returns micro data from 1960 to 1997 to analyze whether taxpayers bunch at the kink points of the U.S. income tax schedule generated by jumps in marginal tax rates. Clear evidence of bunching is found only at the threshold of the first tax bracket where tax liability starts. Evidence for other kink points is weak or null. The large jumps in marginal tax rates created by the Earned Income Tax Credit generate no bunching for wage earners recipients but substantial bunching for self-employed recipients. In the standard micro-economic model, the amount of bunching should be proportional to the size of the compensated elasticity of earnings with respect to tax rates. We introduce uncertainty and rigidities in labor supply choices to account for the empirical results. Numerical simulations show that, even in those cases, behavioral elasticities consistent with the empirical results are small.