Tax Reporting Implications of Asymmetric Treatment: Direct Subsidies Versus Tax Deductions

Posted: 7 Mar 1997

See all articles by Cynthia C. Vines

Cynthia C. Vines

University of Kentucky

Martha L. Wartick

University of Northern Iowa

Date Written: January 1997

Abstract

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

Vines, Cynthia C. and Wartick, Marty, Tax Reporting Implications of Asymmetric Treatment: Direct Subsidies Versus Tax Deductions (January 1997). Available at SSRN: https://ssrn.com/abstract=2911

Cynthia C. Vines

University of Kentucky ( email )

Gatton College of Business & Economics Department of Accountancy
Lexington, KY 40546
United States

Marty Wartick (Contact Author)

University of Northern Iowa ( email )

College of Business Administration Department of Accounting
Cedar Fall, IA 50614-0127
319-273-7754 (Phone)
319-273-2922 (Fax)

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