A Tale of Two Incomes: Notches, Bunching, and Joint Earnings Decisions

• In Event: Taxation of Households

Abstract

We study household financial decisions in response to Australia's Family Tax Benefit B. The structure of this benefit includes a large notch for the primary earner within a household, with benefits falling as much as $5,000 per year when this threshold is crossed. The size of this notch varies with the secondary earner's income, which allows us to learn about joint labor supply decisions within the household. Our initial analysis shows that there is a small group of households whose primary earners are able to bunch sharply at the notch, but that the size of the excess mass is only 3-5% of the empirical distribution. As next steps, we will examine the effect of losing benefits on secondary earner income, household saving decisions, and other outcomes, focusing separately on households which we believe do and do not have sufficient flexibility to ensure that their incomes are below the notch.

Authors

• Ellen Stuart, The University of Sydney

• Ashley Craig, Australian National University

• Steven Hamilton, George Washington University