All in the Family: Bunching Elasticities and Intra-Family Income Shifting

Bunching estimators are widely used in public finance to estimate the elasticity of taxable income. However, their interpretation becomes ambiguous when taxpayers can shift income, as it becomes necessary to distinguish bunching that reflects gen uine changes in economic activity from bunching induced by ex-post income shifting. This paper shows that, under general conditions, fundamental bunching at the in dividual level should imply corresponding bunching in the aggregate taxable income of a “shiftable syndicate.” The shiftable syndicate framework accommodates diverse forms of income-shifting, including both intertemporal and intra-family shifting. Con sequently, the absence of bunching in aggregate income falsifies the presence of fun damental bunching at the individual level. To test this empirically, we develop new statistical methods for assessing whether an empirical income distribution is well ap proximated by a globally smooth distribution. Applying these methods to Australian tax data, we find no bunching in total family income in recent tax years, provid ing strong evidence that much of the observed bunching in individual taxable income arises from intra-family income shifting.