# 3.1 Income Tax

For all rms, income tax is levied on taxable prots, and led annually by December 15, with three quarterly advance payments made in March, June and September.<sup>17</sup> The self-employed face a kinked tax schedule on prots, with ve tax brackets. As Table I shows, the location of all the kinks is adjusted annually for expected ination. The new kink locations are announced by decree each year in the early fall, before the begining of the new scal year. The marginal tax rates which apply to incomes in the ve brackets are 0, 10, 15, 20 and 25% respectively. These rates do not change over the period 2006-2014. The rst kink is the largest kink, representing a 10-percentage-point jump in the marginal tax rate, and the most salient one, as crossing the kink generates a payment obligations. Chetty et al. (2011) suggest that larger kinks generate stronger bunching, as the size of the tax incentive allows some taxpayers to overcome optimization frictions that would otherwise prevent them from bunching.

Corporations face a notched tax schedule on revenue, with three tax brackets and no exempt amount.<sup>18</sup> A rm's revenue determines its average tax rate, which is then applied to prots. The notch locations are again ination-adjusted annually, and the average tax rates of 10, 20 and 30% have not changed during the period we study. Note that the annual adjustment of kink and notch locations generates 54 dierent thresholds over 2006-2014. Out of these, only two are at a round number (kink 1 in 2011, and kink 2 in 2009). This means that persistent bunching at the thresholds cannot be driven by round-number bunching.<sup>19</sup>

# 3.2 Sales Tax

Costa Rica does not have a fully-edged VAT, but levies a sales tax which rms need to declare monthly by the tenth working day of the following month. The base for the sales tax is the sale of goods and certain specied services, which includes for example hotels, tailors, and orists, but excludes most professional services, for instance those provided by lawyers and doctors. The standard rate has been constant at 13% for the entire period of our study, and reduced rates of 10% and 5% respectively are levied on wood and residential electricity. Sales tax paid on inputs can be claimed as credit, which makes the sales tax eectively a VAT with a narrow base. Any

> 17Fiscal year _t_ in Costa Rica starts on October 1 in year _t −_ 1 and ends on September 30 in year _t_ . Taxpayers can request to pay taxes according to a dierent scal period, which we take into account in our analysis. The quarterly advance payment is a quarter of either the previous year's tax liability, or the average liability over the last three years, whichever is higher.

> 18Corporations also claim a dierent set of deductions than unincorproated rms.

> 19Retailers in certain sectors and below certain size thresholds (annual purchases less than 150 base salaries, xed assets less than 350 base salaries, less than six employees) can opt into a simplied regime. In this regime, tax is levied on input at sector-specic rates that vary from 3% to 9.8%. Firms in this regime declare and present quarterly, and can claim credit for withholding by state institutions for the income tax, but not for withholding by credit card institutions for the sales tax. Firms can opt out of the regime by submitting a D140 modication form. For details, see United Nations (2014).

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