Digging into the Channels of Bunching: Evidence From the Uruguayan Income Tax

Based on detailed administrative tax records, we implement a bunching design to explore
how individual taxpayers respond to personal income taxation in Uruguay. We estimate
a very modest elasticity of taxable income at the first kink point (0.06) driven by
a combination of gross labour income and deductions responses. Taxpayers use personal
deductions more intensively close to the kink point and underreport income to the tax authority.
Our results suggest that the efficiency costs of taxation are not necessarily large in
contexts characterised by limited deduction opportunities. Policy efforts should be directed
at broadening the tax base and improving enforcement capacity