Monday, March 24, 2014

How Taxing is Tax Filing? Leaving Money on the Table Because of Compliance Costs

How Taxing is Tax Filing? Leaving Money on the Table Because of Compliance Costs  (PDF File)

Youssef Benzarti 


University of California, Berkeley
March 21, 2013

Abstract:        Every year more than 240 million taxpayers have to file income taxes, imposing a significant cost on the economy. How large is this cost and are taxpayers willing to forego large tax benefits to avoid it? To answer this question, I focus on the choice between itemizing deductions and claiming the standard deduction. 

I use a non-parametric approach along with administrative tax data to show that the cost of itemizing deductions exceeds $700 on average per household and that taxpayers are willing to forego large tax benefits to avoid it. 

I show that this cost is mostly driven by the time spent archiving receipts rather than filling-out forms. The cost also increases in income, consistent with the fact that the value of time of richer households is larger. I explain the magnitude of the cost using a model based on present-bias. I also argue that the results cannot be explained by lack of information nor audit probabilities.



Number of Pages in PDF File: 57


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