How Taxing Is Tax Filing? Leaving Money on the Table Because of Hassle Costs

Posted: 23 Mar 2014 Last revised: 29 Sep 2017

See all articles by Youssef Benzarti

Youssef Benzarti

University of California, Los Angeles (UCLA) - Department of Economics

Date Written: September 28, 2015

Abstract

I use a quasi-experimental design and a novel identification strategy to estimate the burden of filing taxes. Employing a sample of US income tax returns, I observe the preferences of taxpayers when choosing between itemizing deductions and claiming the standard deduction. Taxpayers forego tax savings to avoid the hassle cost of itemizing, resulting in an average burden of itemizing of $644, with substantial heterogeneity. A revealed preference argument implies that itemizing deductions is as painful as working 19 hours. The burden of tax filing is larger for richer households, consistent with the fact that the value of time increases with income. I explore two explanations for the result. First, it could be due to an extreme aversion to filing taxes. Such aversion implies that itemizing deductions imposes aggregate hassles costs of 0.2% of GDP and back-of-the-envelope extrapolations to filing federal taxes yields an overall burden of 1.25% of GDP. Second, if taxpayers are time inconsistent they may forego large benefits even when hassle costs are relatively small due to procrastination. I provide evidence most consistent with taxpayers being present-biased. Both explanations – whether driven by preferences or mistakes – suggest that the tax filing burden is significantly larger than previously estimated. I discuss policy implications of the result.

Keywords: Behavioral, Preferences, Subsidies, Household Economics, Record Keeping

JEL Classification: D03, H24, H31, H83, M41

Suggested Citation

Benzarti, Youssef, How Taxing Is Tax Filing? Leaving Money on the Table Because of Hassle Costs (September 28, 2015). Available at SSRN: https://ssrn.com/abstract=2412703 or http://dx.doi.org/10.2139/ssrn.2412703

Youssef Benzarti (Contact Author)

University of California, Los Angeles (UCLA) - Department of Economics ( email )

Box 951477
Los Angeles, CA 90095-1477
United States

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