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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