Tax Preparation Services for Low- and Moderate-Income Households: Preliminary Evidence from a New Survey

Abstract

In this paper, we examine financial service patterns among low- and moderate-income households as these patterns relate to the tax and withholding system, as well as the process of filing ones taxes. Using a unique data set of low- and moderate-income households, we argue that the federal income tax system provides a unique opportunity to influence low- and moderate-income households' financial decisions. The federal income tax system provides an interesting and important context to study the financial service patterns of low- and moderate-income households for several reasons. First, an overwhelming majority of low- and moderate-income households file tax returns and are eligible for tax refunds. Given the societal goal of redistributing income to low- and moderate-income households through the tax system, optimal income redistribution policy suggests that policymakers focus on reducing the transaction costs associated with tax filing for low-income households. Second, households who face high transaction costs in filing their taxes often face other types of financial constraints, such as not having a bank account or access to credit. Any policy initiative to lower the transaction costs in filing taxes must also consider low-income households financial services patterns and their use of AFS providers. Third, many low- and moderate-income households receive a large, lump sum at the time of their tax refund. Tax return filing and refund receipt may be important moments for household decision-making regarding saving, and thus for savings policy.