Hundreds and thousands: bunching at positive, salient tax balances and the cost of reducing tax liabilities

Australian taxpayers display reference-dependent preferences when filing their tax returns - they
bunch at positive and salient thresholds. We develop a model of taxpayer behavior to show that
bunching heterogeneity reflects both differences in preferences and the rate at which the marginal
cost of reducing one's tax liability increases. Consistent with this model, bunching has grown
alongside electronically prepared returns over recent decades and the subsequent responses of
tax agents. Taxpayers receiving these balances are more likely to stay with their tax agent, but do
not pay higher fees. Consistent with having flatter cost curves, `high-bunching' agents deliver
larger balances more generally and do so by lifting deductions and lowering reported income for
return items where audits are costly.