Beyond the Notch: Revenue Manipulation and Business Splitting under Simplified Tax System

Simplified tax regimes with explicit eligibility thresholds are a common tool which reduces tax burden but distorts firms' behavior, creating local bunching just below the threshold. However, we show that when firms have access to business splitting their responses extend far beyond the local margin. Our model demonstrates that splitting reduces local bunching but amplifies distortions elsewhere in the distribution. Exploiting a reform in Russia's Simplified Tax System that significantly raised the revenue threshold, allowing us to use the post-reform distribution as a counterfactual, we detect an excess mass far below the threshold, providing the evidence that extensive-margin responses matter.