Who Understands The French Income Tax? Bunching Where Tax Liabilities Start

Lack of tax transparency may strongly impact taxpayers' behavior. This paper disentangles responses to incentives from attention to taxes at the level where French income tax liabilities start. When reporting their earnings, tax filers may be confused between two potential thresholds: the true Tax Collection Threshold (TCT), a notch, and a wrong Taxation Threshold (TT), which is a kink. Using a comprehensive dataset on individual income tax returns from 2008 to 2015, I highlight significant bunching in the taxable income distribution at both thresholds. Within a model of tax misperception, I estimate that taxpayers are far from paying full attention to the income tax system, yet display strong reactions to the marginal tax rate they perceive. This framework can account for behavioral responses to a rise in the virtual marginal tax rate at the wrong threshold and may prove useful to detect policies improving attention to taxes. Contrasting hard-copy and online tax filers, the misperception model reveals a better understanding of the tax system by the latter.