ESRI Research Seminar - Frictions and the elasticity of taxable income: evidence from bunching at tax thresholds in the UK

Venue: ESRI, Whitaker Square, Sir John Rogerson’s Quay, Dublin 2

Speaker: Barra Roantree, Research Economist, Institute for Fiscal Studies

Note: The presentation delivered by Barra Roantree at this seminar is now available to download here.

The standard neoclassical model of labour supply predicts that individuals should bunch at discontinuities and convex kink-points in the budget set, such as those created by progressive tax systems. Saez (2010) showed that the extent of this bunching can be used to estimate the elasticity of taxable income, a parameter that under certain conditions measures the efficiency costs of taxation. However, optimising frictions might attenuate reduced-form estimates of the ETI (or the elasticity of labour supply) away from the parameter relevant for responses in other settings (e.g. for a smaller tax change). This paper provides evidence from bunching at tax thresholds in the UK that such frictions are substantial, and could help reconcile macro and micro estimates of the elasticity of labour supply. We also find significant heterogeneity in frictions that corresponds closely to well-documented differences in elasticity estimates, raising the question whether the literature identifies differences in preferences or differences in frictions between men and women.

Barra Roantree

Barra is a Research Economist in the Income, Work and Welfare sector of the IFS. His current projects include a cross-country collaborative analysis of the effects of social security contributions on earnings, an investigation into some of the factors underlying increased employment among women in the UK over the past 40 years, and research into the incidence of in-work tax credits paid to low income households. The paper is joint work with Stuart Adam, James Browne, and David Phillips.

There is no fee for this event but please register your attendance using the following link.