Working Paper: NBER ID: w2526
Authors: Mark M. Pitt; Joel Slemrod
Abstract: The resource cost of operating the income tax system is large, totaling as much as seven to eight percent of revenue raised. One source of this cost is the system of itemized deductions, which can require extensive record keeping and calculation. This paper estimates the resource cost of itemizing deductions. In contrast to previous studies of compliance cost which rely an survey evidence, we infer this evidence from data reported on tax returns which suggest that there exists taxpayers who would save money by itemizing but who choose not to. We find that in 1982 the private cost of itemizing totaled $1.44 billon, or $43 per itemizing taxpayer. The compliance cost dissuaded from itemizing aver 650,000 taxpayers who would have thereby saved taxes, causing an extra tax liability of nearly $200 million. Increasing the standard deduction by $1,000 would save $100 million in resources that would otherwise have been devoted to itemizing.
Keywords: tax compliance; itemized deductions; taxpayer behavior
JEL Codes: H24; H31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| compliance costs (C) (Q52) | taxpayer behavior (itemizing or not) (H32) |
| tax savings (T) (H25) | compliance costs (C) (Q52) |
| standard deduction increase ($1,000) (H20) | compliance costs savings ($100 million) (Q52) |
| taxpayer characteristics (H20) | compliance costs (C) (Q52) |
| complexity in itemization process (C69) | compliance costs (C) (Q52) |