Bunching Around a Tax Threshold: Lessons from Scotland's Small Business Bonus Scheme

Abstract

This article examines how thresholds in tax relief policies can create incentives for businesses to strategically sort around eligibility cut-offs. We study Scotland’s Small Business Bonus Scheme, which provides full relief from business rates for nondomestic properties with rateable value below a fixed threshold, and partial relief above it. Using administrative data for the city of Glasgow (2009–2019), we estimate a regression discontinuity around the eligibility cut-off and find a higher concentration of active businesses below the 100% relief threshold. We then document a discontinuity in the distribution of periodic rateable value reassessments at the threshold, consistent with bunching. Indeed, while our regression discontinuity analysis indicates that the number of active businesses on either side of the cut-off differs in ways that could be suggestive of the policy’s intended effects, these differences cannot be interpreted as clean causal effects because the identifying assumption of no manipulation is violated. The evidence instead points to strategic responses to policy design and highlights how hard thresholds in tax-relief policies can incentivize manipulation around those thresholds and undermine regression discontinuity designs. Because eligibility here is based on administratively assessed property values, manipulation is less obviously expected than in settings where firms directly control the running variable, which makes the finding of bunching particularly significant. More broadly, the article highlights the challenges that threshold-based policies can pose for both policy implementation and empirical evaluation, with important implications for the design of similar tax policies.