Hundreds and thousands : bunching at positive, salient tax balances and the cost of reducing tax liabilities

Australian taxpayers display reference-dependent preferences when filing their tax returns - theybunch at positive and salient thresholds. We develop a model of taxpayer behavior to show thatbunching heterogeneity reflects both differences in preferences and the rate at which the marginalcost of reducing one's tax liability increases. Consistent with this model, bunching has grownalongside electronically prepared returns over recent decades and the subsequent responses oftax agents. Taxpayers receiving these balances are more likely to stay with their tax agent, but donot pay higher fees. Consistent with having flatter cost curves, `high-bunching' agents deliverlarger balances more generally and do so by lifting deductions and lowering reported income forreturn items where audits are costly