Do local tax preparers strengthen the influence of tax policy on individual behavior?

Abstract

One function of the tax code is to implement social policy, incentivizing members of the public to make decisions policymakers believe to be desirable. But the tax code is complex and acquiring and processing complex information is costly. In this study, we hypothesize that tax preparers serve as information intermediaries between policymakers and taxpayers, reducing information frictions in the implementation of tax-based social policy. Using data on individual-tax returns at the zip code level, we first show that taxpayers made earlier use of new tax credits introduced by the Energy Tax Incentives Act of 2005 in places with more tax preparers. We then show that state-level sales of ENERGY STAR certified air conditioners increased particularly quickly in states with the most tax preparers. Finally, we show that usage of the earned income tax credit, the third largest entitlement program in the U.S., is also positively associated with tax preparer concentration.

Keywords: tax preparers, information intermediaries, tax-based social policy, local information transfer, tax expenditures, Energy Tax Incentives Act of 2005, earned income tax credit

JEL Classification: M48, R23, H23, H24, I38