Tax Returns, Tax Deductibility of Costs of Studying and the Importance of Comprehensible Information – An Empirical Analysis

Abstract

The German tax system allows tax deductibility of costs of studying either as special expenses or as work-related tax deductions. However, filing tax returns and utilizing tax deductibility of costs of studying are hampered if benefits are not obvious, if costs are not automatically accounted for and if changes in regulation increase uncertainty. Purpose of the study is to determine if students file tax returns and if they include costs of studying. We employ a questionnaire-based survey design. We also test if students assess straightforward and short self-developed explanations as more suitable than explanations from tax return forms when it comes to explaining tax deductibility of costs of studying. We find that 63% of the respondents did not submit any tax return, 72% did not utilize tax deductibility of costs of studying and 54% state to be hardly informed. The self-developed text is assessed as being more suitable. An immediate implication of these findings is the need to simplify information on taxation, in particular regarding the income tax return, and tax deductibility, and to make such information more understandable. They also encourage evidence-based development of target group specific explanatory texts on tax issues, such as explanations for students, people in vocational training or those in further education. Achieving more widespread utilization of tax deductibility of costs of studying would result in financial benefits for students in the form of a reduced tax burden either already during the studies or in subsequent years.

Keywords: Tax Literacy, Costs of Studying, Work Related Tax Deductions, Special Expenses, Behavioral Economics

JEL Classification: A22, D04, D12, D14, D83, H24