Working papers

Optimal deductibility: Theory, and evidence from a bunching decomposition

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I define a new tax instrument, the 'deductibility rate', which specifies the proportion of eligible expenses a taxpayer may deduct when preparing her taxes. If the utilities of gross income and deductions are separable, then the deduction elasticity reflects the revenue leakage caused by greater deductibility. To identify this elasticity, I develop the first method to decompose bunching in taxable income into its constituent parts, exploiting the removal of a notch in the tax schedule. This setting also generates an observed counterfactual density, obviating the parametric assumptions routinely made in bunching studies. Applying this method to new administrative tax data from Australia, I find that while deductions account for just 5% of taxable income, they account for 35% of the response of taxable income to the tax rate. Based on an elasticity of taxable income of 0.06, the deduction elasticity is -0.45, and the gross-income elasticity is 0.04. Consistent with standard optimal-tax logic, the sensitivity of deductions to the tax rate suggests that restricting deductions could raise welfare.

Works in progress

A propensity-score reweighting correction for manipulation bias in regression-discontinuity designs, with Traviss Cassidy

Manipulation of the running variable can invalidate the use of a regression-discontinuity (RD) design. Many settings in which a RD design would otherwise be appropriate offer a comparison group for which the treatment status does not change at the threshold. I devise a propensity-score reweighting method to correct for bias resulting from manipulation, exploiting information about the comparison group under ‘manipulation-on-observed-variables’ and common-support assumptions. I assess the method in a simulation exercise, and use the method to estimate the effect of an Australian health insurance levy, which applies beyond a certain income to the uninsured, and is subject to manipulation by those seeking to avoid the penalty.

United we evade: A theory of tax evasion under third-party reporting, with Yeliz Kacamak

When a tax authority requires reports from third parties about a taxable transaction, tax evasion is feasible only if the reporters underreport collusively. I develop a model of third-party reporting to investigate its limits as an enforcement tool. Under what conditions is a third-party reporting regime robust to collusion between reporters? The deterrence effect of third-party reporting increases with the number of reporters per transaction and with uncertainty about the other reports. Under certain conditions, third-party reporting can ensure full compliance when a common report is required across transactions. Compliance also improves with the number of related transactions in which there is underreporting, such that there is a maximum number of related transactions beyond which evasion is infeasible. These findings offer insights into the settings in which third-party reporting obligations are most effective in increasing compliance.