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Tax Systems$
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Joel Slemrod and Christian Gillitzer

Print publication date: 2014

Print ISBN-13: 9780262026727

Published to MIT Press Scholarship Online: May 2014

DOI: 10.7551/mitpress/9780262026727.001.0001

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Notches and Optimal Line Drawing

Notches and Optimal Line Drawing

(p.157) 11 Notches and Optimal Line Drawing
Tax Systems

Joel Slemrod

Christian Gillitzer

The MIT Press

This chapter addresses the ubiquitous real-world problem of how to draw and interpret lines that separate cases where discretely different tax treatments apply. Despite its ubiquity and real-world relevance, line drawing has heretofore been almost completely absent from economic analysis. The chapter discusses attempts to introduce characteristics of tax bases, on which tax lines are drawn, into optimal tax analysis. It notes that lines create notches in choice sets, where tax liability changes sharply as the characteristics of a good change trivially but cross the statutory lines. The notches in turn induce bunching of choices just on the lower-taxed side of the line, and in many cases tax-induced product creation and destruction. Examples of quantity notches, time notches, and geographic border notches are discussed.

Keywords:   Tax lines, Tax notches, Bunching

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