Daniel le Maire og Bertel Schjerning får optaget artikel i Journal of Public Economics

In this paper, we investigate sources that drive the massive bunching of Danish self-employed at the kinks of the tax schedule. We ask the following question: can we really interpret the pronounced bunching in taxable income for the self-employed as a real behavioral response in earned income, or is bunching for the self-employed primarily driven by income shifting and reporting effects? We show that the intertemporal tax planning of the Danish self-employed implies pronounced bunching around the major kinks of the Danish tax system, because self-employed individuals can legally use retained earnings to temporarily reduce tax liability and thereby locate exactly at the kinks of the tax-schedule without changing their effort to earn profits. If income shifting was neglected, we would estimate a taxable income elasticity in the range of 0.43-0.53 and erroneously conclude that taxable incomes for the self-employed were highly sensitive to changes in marginal tax rates. To distinguish bunching based on real responses and bunching based on pure income shifting, we therefore propose a dynamic extension to Saez (2010) bunching formula. Using our method, we show that more than half of the bunching in taxable income is driven by intertemporal income shifting, implying a structural elasticity of 0.14-0.20.