Assignment:

The assignment has four questions (a tod), with different weights. While the word count for each question is indicative, the overall word count of the assignment should not exceed 2000 words (this is a strict word count limit). Your list of references does not count towards the word  limit  but  in-text  citations  do.  Suggested  readings  are  only  key  references,  you  are encouraged to read additional sources.

a)   Explain how kinks and notches are used to estimate the elasticity of taxable income with respect to the net of tax rate (‘). Use formulae and diagrams to illustrate your answer. 400 words [20%]

Suggested readings:

Saez, E. (2010). Do taxpayers bunch at kink points? American Economic Journal: Economic Policy, 2(3):180-212.

Kleven, H. and Waseem, M. (2013). Using notches to uncover optimization frictions and structural  elasticities:  Theory  and  evidence  from   Pakistan.   The  Quarterly  Journal  of Economics, 128(2): 669-273.

Kleven, H. (2016). Bunching. Annual Review of Economics, 8: 435-464.

b)   Discuss  how notches help to uncover optimization frictions in the labour market. What are the implications of these frictions for empirical estimates of the elasticity of taxable income with respect to the net of tax rate (‘)? Use diagrams to illustrate your answer. 400 words [20%]

Suggested readings:

Kleven, H. and Waseem, M. (2013). Using notches to uncover optimization frictions and structural  elasticities:  Theory  and  evidence  from   Pakistan.   The  Quarterly  Journal  of Economics, 128(2): 669-273.

c)   Based on Adam et al. (2020) discuss what the evidence from kinks and notches tells us about the elasticity of taxable income with respect to the net of tax rate (‘) and labour market frictions in the UK. 400 words [20%]

Suggested readings:

Adam,  S.,  Browne,  J.,   Phillips,   D.  and  Roantree,  B.  (2020).  Frictions  and  taxpayer responses:  Evidence  from  bunching  at  personal  tax  thresholds.  International  Tax  and Public Finance, 28: 612-653.

d)  “ The elasticity of taxable income is vital when predicting the effect of taxes. Bunching at kinks/notches has been used to estimate this elasticity. We show that when the preference distribution is unrestricted, bunching atakinkora notch is not informative about the size of the elasticity, and neither is the entire distribution of taxable income” (Blomquistetal., 2021). Critically discuss. Use diagrams to illustrate your answer. 800 words [40%]

Suggested readings:

Blomquist, S., Newey, W., Kumar, A., and Liang, C. (2021). On bunching and identification of the taxable income elasticity. Journal of Political Economy, 129(8): 2320-2343.

Referencing : you must adhere to usual referencing style (Harvard) within-text references and a list of references at the end.

Module Learning Outcomes:

In this assessment the following learning outcomes will be covered:

LO 1. Apply economic concepts and principles to explain the potential behavioural responses associated with changes to the structure of the income tax.

LO 2. Demonstrate critical knowledge and understanding of the difficulties associated with the design of tax policy.

Grading Criteria:

See attached marking rubric.

Feedback to Students:

Both Summative and Formative feedback is given to encourage students to reflect on their learning that feed forward into following assessment tasks. The preparation for all assessment tasks will be supported by formative feedback within the tutorials/seminars.

Written feedback is provided as appropriate.  Please be aware to use the browser and not the Canvas App as you may not be able to view all comments.