Market behaviour versus tax planning responses to changes in marginal income tax rates among older couples / by Derek Messacar. : CS11-0019/410E-PDF

"The standard model of labour supply predicts that individuals’ taxable incomes will bunch at convex kink points in the budget set created by government tax and transfer systems. However, empirical evidence of such behaviour is scarce. Using administrative tax data from Canada, this paper estimates bunching responses in taxable income among older individuals at discontinuities in marginal tax rates created by federal and provincial and territorial systems, from 2001 to 2012. The results show that bunching is prevalent across the income distribution, but this is mostly driven by married individuals from 2007 onward. Further analysis reveals this occurs predominantly because pensioners split some of their pension income with their spouses who tend to have lower marginal tax rates. Pensioners do this pursuant to the introduction of this tax planning program in the 2007 federal budget. These findings offer credible evidence of significant intra-household tax planning behaviour that depends on the availability of deductions"--Abstract, p. 5.

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