Bunching, Tax Regime Notches and Taxpayer Behavior

Bunching, Tax Regime Notches and Taxpayer Behavior | Research Square window.SnipcartSettings = { analytics: { enabled: false } }; (function() { var accessVector = localStorage.getItem('access_vector') || ''; window.dataLayer = window.dataLayer || []; if (accessVector) { window.dataLayer.push({ user: { profile: { profileInfo: { snid: accessVector } } } }); } })(); (function(w,d,s,l,i){w[l]=w[l]||[];w[l].push({'gtm.start':new Date().getTime(),event:'gtm.js'});var f=d.getElementsByTagName(s)[0],j=d.createElement(s),dl=l!='dataLayer'?'&l='+l:'';j.async=true;j.src='https://www.googletagmanager.com/gtm.js?id='+i+dl;f.parentNode.insertBefore(j,f);})(window,document,'script','dataLayer','GTM-K279D39R'); Browse Preprints In Review Journals COVID-19 Preprints AJE Video Bytes Research Tools Research Promotion AJE Professional Editing AJE Rubriq About Preprint Platform In Review Editorial Policies Our Team Advisory Board Help Center Sign In Submit a Preprint Cite Share Download PDF Research Article Bunching, Tax Regime Notches and Taxpayer Behavior Wladimir Zanoni, Juan Pantano, Paul Carrillo-Maldonado, Nicolas Chuquimarca This is a preprint; it has not been peer reviewed by a journal. https://doi.org/ 10.21203/rs.3.rs-6355627/v1 This work is licensed under a CC BY 4.0 License Status: Posted Version 1 posted You are reading this latest preprint version Abstract In this study, we examine the behavior of self-employed taxpayers in Ecuador who “bunch" at an income level just below a critical threshold, which triggers a transition from a simple tax regime to a more complex one. Under the simple regime, individuals complete their tax forms independently, while the complex regime mandates the use of a public accountant for maintaining accounting records. Utilizing data from the Ecuadorian tax authority from 2011 to 2014, we first document the bunching behavior prompted by the shift between regimes. Subsequently, we assess the impact of this regime transition on the amount of taxes paid by those self-employed taxpayers who choose to fill taxes in the complex regime. Our methodology employs “donut” estima-tors to evaluate these effects avoiding the endogeneity induced by those who change their business operations or their reported incomes to avoid the complex regime. We find that the regime shift indeed prompts taxpayers to bunch below the income threshold , opting to remain within the simpler regime. Interestingly though, those who transition into the complex regime tend to pay less in taxes. This pattern holds across various bunching windows and is consistent across several estimators used. Our results suggest that accountants are the key mechanism behind the effects, for they help taxpayers better navigate tax deductions and benefits, leading many self-employed individuals to pay zero taxes. JEL Codes: H24, H26, D12 Tax Regimes Progressive Taxes Personal Income Tax Bunching Full Text Additional Declarations No competing interests reported. Cite Share Download PDF Status: Posted Version 1 posted You are reading this latest preprint version Research Square lets you share your work early, gain feedback from the community, and start making changes to your manuscript prior to peer review in a journal. As a division of Research Square Company, we’re committed to making research communication faster, fairer, and more useful. We do this by developing innovative software and high quality services for the global research community. Our growing team is made up of researchers and industry professionals working together to solve the most critical problems facing scientific publishing. Also discoverable on Platform About Our Team In Review Editorial Policies Advisory Board Help Center Resources Author Services Accessibility API Access RSS feed Manage Cookie Preferences © Research Square 2026 | ISSN 2693-5015 (online) Privacy Policy Terms of Service Do Not Sell My Personal Information {"props":{"pageProps":{"initialData":{"identity":"rs-6355627","acceptedTermsAndConditions":true,"allowDirectSubmit":true,"archivedVersions":[],"articleType":"Research Article","associatedPublications":[],"authors":[{"id":440691812,"identity":"8c813551-3d0d-4f3e-b058-b44821a6b00a","order_by":0,"name":"Wladimir Zanoni","email":"data:image/png;base64,iVBORw0KGgoAAAANSUhEUgAAAZAAAAAyAQMAAABI0h/eAAAABlBMVEX///8AAABVwtN+AAAACXBIWXMAAA7EAAAOxAGVKw4bAAAAtElEQVRIiWNgGAWjYPACCTk2BgYz0rQYk6yFIbGBaC0G5w8/e/Bxh0V6H/vhbQ8YKu7ZNRDUcuCYueHMMxK5bTxp5QYMZ4qTCWoxO9hgJs3bBtTCkGMmwdiWkEzQYWaH2b+BtKSz8b8hVssxHrAtCWwSEFvsCGqxP8NTJjmzTcKwTeJZuUHCmYQEglok+49vk/jYVicv35+87cGHigR7glpQQQIkgkgEpNoyCkbBKBgFIwAAAJELNddxlzfrAAAAAElFTkSuQmCC","orcid":"","institution":"Inter-American Development Bank","correspondingAuthor":true,"prefix":"","firstName":"Wladimir","middleName":"","lastName":"Zanoni","suffix":""},{"id":440691813,"identity":"3e0b9cd1-2cb5-46bd-8c95-a3fcfb271c5c","order_by":1,"name":"Juan Pantano","email":"","orcid":"","institution":"University of Hong Kong","correspondingAuthor":false,"prefix":"","firstName":"Juan","middleName":"","lastName":"Pantano","suffix":""},{"id":440691814,"identity":"35b35ba3-15ba-4b5b-937f-1901ca6451b1","order_by":2,"name":"Paul Carrillo-Maldonado","email":"","orcid":"","institution":"Universidad de Las Américas","correspondingAuthor":false,"prefix":"","firstName":"Paul","middleName":"","lastName":"Carrillo-Maldonado","suffix":""},{"id":440691815,"identity":"6118c7cb-d864-4daf-afbe-22d4599f7b14","order_by":3,"name":"Nicolas Chuquimarca","email":"","orcid":"","institution":"Queen Mary University of London","correspondingAuthor":false,"prefix":"","firstName":"Nicolas","middleName":"","lastName":"Chuquimarca","suffix":""}],"badges":[],"createdAt":"2025-04-01 19:23:09","currentVersionCode":1,"declarations":"","doi":"10.21203/rs.3.rs-6355627/v1","doiUrl":"https://doi.org/10.21203/rs.3.rs-6355627/v1","draftVersion":[],"editorialEvents":[],"editorialNote":"","failedWorkflow":false,"files":[{"id":84051710,"identity":"3cba4561-421c-4468-81d1-d0df14a42915","added_by":"auto","created_at":"2025-06-06 08:32:34","extension":"pdf","order_by":1,"title":"","display":"","copyAsset":false,"role":"manuscript-pdf","size":6901559,"visible":true,"origin":"","legend":"","description":"","filename":"BunchingTaxRegimeNotchesBehavior.pdf","url":"https://assets-eu.researchsquare.com/files/rs-6355627/v1_covered_16380753-b6f9-4b1c-9106-2fc9c146774f.pdf"}],"financialInterests":"No competing interests reported.","formattedTitle":"Bunching, Tax Regime Notches and Taxpayer Behavior","fulltext":[],"fulltextSource":"","fullText":"","funders":[],"hasAdminPriorityOnWorkflow":false,"hasManuscriptDocX":false,"hasOptedInToPreprint":true,"hasPassedJournalQc":"","hasAnyPriority":false,"hideJournal":true,"highlight":"","institution":"","isAcceptedByJournal":false,"isAuthorSuppliedPdf":true,"isDeskRejected":"","isHiddenFromSearch":false,"isInQc":false,"isInWorkflow":false,"isPdf":true,"isPdfUpToDate":true,"isWithdrawnOrRetracted":false,"journal":{"display":true,"email":"[email protected]","identity":"researchsquare","isNatureJournal":false,"hasQc":true,"allowDirectSubmit":true,"externalIdentity":"","sideBox":"","snPcode":"","submissionUrl":"/submission","title":"Research Square","twitterHandle":"researchsquare","acdcEnabled":true,"dfaEnabled":false,"editorialSystem":"","reportingPortfolio":"","inReviewEnabled":false,"inReviewRevisionsEnabled":true},"keywords":"Tax Regimes, Progressive Taxes, Personal Income Tax, Bunching","lastPublishedDoi":"10.21203/rs.3.rs-6355627/v1","lastPublishedDoiUrl":"https://doi.org/10.21203/rs.3.rs-6355627/v1","license":{"name":"CC BY 4.0","url":"https://creativecommons.org/licenses/by/4.0/"},"manuscriptAbstract":"\u003cp\u003eIn this study, we examine the behavior of self-employed taxpayers in Ecuador who “bunch\" at an income level just below a critical threshold, which triggers a transition from a simple tax regime to a more complex one. Under the simple regime, individuals complete their tax forms independently, while the complex regime mandates the use of a public accountant for maintaining accounting records. Utilizing data from the Ecuadorian tax authority from 2011 to 2014, we first document the bunching behavior prompted by the shift between regimes. Subsequently, we assess the impact of this regime transition on the amount of taxes paid by those self-employed taxpayers who choose to fill taxes in the complex regime. Our methodology employs “donut” estima-tors to evaluate these effects avoiding the endogeneity induced by those who change their business operations or their reported incomes to avoid the complex regime. We find that the regime shift indeed prompts taxpayers to bunch below the income threshold , opting to remain within the simpler regime. Interestingly though, those who transition into the complex regime tend to pay less in taxes. This pattern holds across various bunching windows and is consistent across several estimators used. Our results suggest that accountants are the key mechanism behind the effects, for they help taxpayers better navigate tax deductions and benefits, leading many self-employed individuals to pay zero taxes.\u003c/p\u003e\n\u003cp\u003eJEL Codes: H24, H26, D12\u003c/p\u003e","manuscriptTitle":"Bunching, Tax Regime Notches and Taxpayer Behavior","msid":"","msnumber":"","nonDraftVersions":[{"code":1,"date":"2025-04-11 18:08:42","doi":"10.21203/rs.3.rs-6355627/v1","editorialEvents":[{"type":"communityComments","content":0}],"status":"published","journal":{"display":true,"email":"[email protected]","identity":"researchsquare","isNatureJournal":false,"hasQc":true,"allowDirectSubmit":true,"externalIdentity":"","sideBox":"","snPcode":"","submissionUrl":"/submission","title":"Research Square","twitterHandle":"researchsquare","acdcEnabled":true,"dfaEnabled":false,"editorialSystem":"","reportingPortfolio":"","inReviewEnabled":false,"inReviewRevisionsEnabled":true}}],"origin":"","ownerIdentity":"32daf9f6-b567-400f-a8cd-541011623d39","owner":[],"postedDate":"April 11th, 2025","published":true,"recentEditorialEvents":[],"rejectedJournal":[],"revision":"","amendment":"","status":"posted","subjectAreas":[],"tags":[],"updatedAt":"2025-06-06T08:24:01+00:00","versionOfRecord":[],"versionCreatedAt":"2025-04-11 18:08:42","video":"","vorDoi":"","vorDoiUrl":"","workflowStages":[]},"version":"v1","identity":"rs-6355627","journalConfig":"researchsquare"},"__N_SSP":true},"page":"/article/[identity]/[[...version]]","query":{"redirect":"/article/rs-6355627","identity":"rs-6355627","version":["v1"]},"buildId":"XKTyCvWXoU3ODBz1xrDgd","isFallback":false,"isExperimentalCompile":false,"dynamicIds":[84888],"gssp":true,"scriptLoader":[]}