Does professional tax preparation matter? Empirical evidence from Germany

Abstract

This paper is an empirical assessment of the average effect of tax consultants on non-business taxpayers’ tax burden. The author uses German income tax return data to identify tax returns filed by a tax consultant. In contrast to previous research, propensity score matching is used to construct an appropriate control group to eliminate problems arising from self-selection. The effect of tax consultants is found to be twofold and depends on the income level. On the one hand, tax consultants reduce the tax burden of clients on a high income. Possible reasons for this are the progressive income tax rate as well as income-dependent deductions, e.g., donations, which offer tax consultants greater scope to make use of their superior tax knowledge. However, this effect is reversed for clients on comparatively low incomes. This finding is in line with the interpretation that, besides the already identified disburdening impact, a tax consultant can also act as a preceding enforcement instance that mitigates clients’ excessively aggressive filing strategies.