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Do Very High Tax Rates Induce Bunching? Implications for the Design of Income Contingent Loan Schemes

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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.
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Keywords: H31; H52

Document Type: Research Article

Affiliations: 1:  Crawford School of Economics and Government, Australian National University, Canberra, ACT, Australia 2:  Economics Program, Research School of Social Sciences, Australian National University, Canberra, ACT, Australia

Publication date: September 1, 2009

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