Working Paper: NBER ID: w23903
Authors: Youssef Benzarti
Abstract: This paper uses a quasi-experimental design and a novel identification strategy to estimate the cost of filing income taxes. First, using US income tax returns, I observe how taxpayers choose between itemizing deductions and claiming the standard deduction. Taxpayers forgo tax savings to avoid compliance costs, which provides a revealed preference estimate of the compliance cost of itemizing. I find that this cost increases with income, consistent with a higher opportunity cost of time for richer house- holds. Second, using my estimates and estimates of the time required to file other schedules, I estimate the cost of filing federal income taxes. I find that this cost has been increasing since the 1980’s and has reached 1.2% of GDP in the most recent years.
Keywords: tax compliance costs; itemizing deductions; standard deduction; quasi-experimental design
JEL Codes: H24; H31; H83
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| missing mass of itemizers just above the standard deduction threshold (H31) | taxpayers forgo tax savings (H26) |
| richer households (D14) | forgo larger tax benefits (H29) |
| total filing costs increasing over time (K41) | costs of filing taxes are substantial (K34) |
| reducing compliance costs (G38) | welfare-improving (D60) |
| compliance costs (Q52) | taxpayers' decisions to itemize deductions versus claim the standard deduction (H20) |