What do taxpayers prefer: Lower taxes or a better year-end position? A research note

Abstract

What do people prefer, lower taxes or better year-end position? To our knowledge this is the first study that examines which component of individuals’ tax outcome, total tax or year-end position, drives their perceptions regarding their tax outcome as well as the legislation responsible. Based on prior economic and tax literature, especially borrowing from prospect theory and mental accounting, we predict that people are more likely to anchor on their prepayment position rather than on the total taxes in forming their perceptions about their tax position and their views on tax law changes. Based on a sample of 98 U.S. taxpayers we find that our predictions are supported. Specifically, we find that (1) people prefer a better year-end position than lower taxes; and (2) this preference is consistent regardless of whether they are in a refund or tax due position. Implications for public policy and accounting practitioners are also discussed.