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Building on the work of Chapman & Leigh (2009) we examine behavioural responses to the first repayment threshold in Australia’s Higher Education Contributions Scheme (HECS). We find significant bunching below the notch created by first HECS threshold; however, we also find that a large share of individuals face significant frictions which prevent them from reducing their income. These frictions likely explain low estimates of the observed elasticity of taxable income in bunching studies based on kinks. Following Kleven & Waseem (2013), we estimate structural elasticities of (repayment) taxable income unattenuated by frictions. We find significant heterogeneity in structural elasticities across different sub-groups of the population ranging from around 0.05 for wage earners to 0.64 for self employed tax filers.
Shane Johnson is a Sir Roland Wilson PhD Scholar at the ANU’s Tax and Transfer Policy Institute. His research is focused on understanding taxpayer responses to Australia’s personal income tax system.