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Do Very High Tax Rates Induce Bunching? Implications for the Design of Income Contingent Loan Schemes *
Author(s) -
CHAPMAN BRUCE,
LEIGH ANDREW
Publication year - 2009
Publication title -
economic record
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.365
H-Index - 42
eISSN - 1475-4932
pISSN - 0013-0249
DOI - 10.1111/j.1475-4932.2009.00554.x
Subject(s) - taxable income , taxpayer , economics , loan , income tax , debt , tax rate , monetary economics , labour economics , econometrics , demographic economics , public economics , finance , macroeconomics , accounting
Under the Higher Education Contribution Scheme graduates face a sharp discontinuity in their taxable incomes. At the first repayment threshold, they are required to pay a percentage of their entire income to reduce their debts. This results in an extremely high effective marginal tax rate. Using a sample of taxpayer returns we investigate whether taxpayers bunch below the repayment threshold. We find a statistically significant degree of bunching below the threshold, but the effect is economically small. The result has important implications for the design of income contingent university loan schemes.