Bunching, tax regime notches and taxpayer behavior

This study evaluates the effects of a tax regime threshold on reported incomes among self-employed taxpayers in Ecuador. Under the simple regime, individuals file taxes independently, whereas the complex regime requires taxpayers to hire a licensed public accountant. Using tax authority data from 2011–2014, we document bunching and assess its impact on taxes paid. Employing "donut" estimators to address endogeneity, we find that taxpayers bunch below the threshold to avoid the complex regime. Contrary to standard labor supply theory, total tax liability is lower just above the threshold, contradicting classical predictions for downward tax notches.