Avoiding tax penalties: Evidence from Australia’s Medicare Levy Surcharge

We analyse tax filer responses to Australia’s Medicare Levy Surcharge – an insurance mandate designed to encourage individuals to take up private hospital insurance. The policy imposes a surcharge on individuals without adequate private insurance whose income exceeds a specified threshold, effectively creating a “notch” in the tax schedule. Using administrative tax records, we identify bunching behaviour around the threshold and estimate the extent that individuals adjust reported income to avoid the surcharge. Our findings provide new evidence on the elasticity of taxable income, and contribute to a broader understanding of how taxpayers respond to non-linearities in the tax system.