Tax Reporting Implications of Asymmetric Treatment: Direct Subsidies Versus Tax Deductions
Posted: 7 Mar 1997
Date Written: January 1997
The Treasury Department recently criticized use of the federal income tax system to deliver indirect subsidies to taxpayers in the form of tax deductions, and recommended that all such deductions be eliminated. It recognized, however, that it would be necessary to replace some tax deductions with direct subsidies. Using an experimental economics design, we examined whether the form of the subsidy (tax deduction or direct subsidy) affects tax reporting. Despite the economic equivalence of the two forms of subsidy, we found that taxpayers disadvantaged by not receiving a direct subsidy reported more income than taxpayers disadvantaged by not receiving a tax deduction. In addition, we examined the effect of exchange equity on tax reporting by incorporating a public good into the experiment and distributing the public good either equally or unequally. We found that when the public good was allocated to offset inequities due to the asymmetric distribution of tax deductions or direct subsidies, disadvantaged taxpayers reported income comparable to that reported by equitably treated taxpayers. This result provides evidence that exchange equity can moderate horizontal inequity resulting form asymmetric tax deductions or direct subsidies.
JEL Classification: H24, H26, H21, K34
Suggested Citation: Suggested Citation