Tax Filers Research Articles

Tax‐Time Savings among Low‐Income Households in the $aveNYC Program

This article explores savings outcomes for participants in the $aveNYC tax‐time matched savings program compared with a group of New York City tax filers who were not offered the program. $aveNYC was administered at Volunteer Income Tax Assistance sites during the 2008–2010 tax seasons. The program offered taxpayers the opportunity to open a savings account with their tax refund and receive a 50% match on their initial deposit. The study's primary outcome is savings held by respondents 6–11 months after receipt of matching funds. We compare participants in the 2009 program cohort to a comparison group on the following outcomes: level of savings, having nonzero savings, and having enough savings to cover one or two months of expenses at current consumption levels. We find significant differences on savings levels, the presence of any savings, and the likelihood of having savings to meet one month's expenses.

Encouraging Low- and Moderate-Income Tax Filers to Save: Implementation and Interim Impact Findings from the SaveUSA Evaluation

SaveUSA, a voluntary program launched in 2011 in four cities (New York City, Tulsa, San Antonio, and Newark), encourages low- and moderate-income individuals to set aside money from their tax refund for savings. Tax filers at participating Volunteer Income Tax Assistance (VITA) sites can directly deposit all or a portion of their tax refund into a special savings account, set up by a bank or credit union, and pledge to save between $200 and $1,000 of their deposit for about a year. Money can be withdrawn from SaveUSA accounts at any time and for any purpose, but only those who maintain their initially pledged savings amount throughout a full year receive a 50 percent match on that amount. Account holders, irrespective of match receipt, can deposit tax refund dollars in subsequent years and become eligible to receive additional savings matches on their new tax refund deposits.This report presents findings on SaveUSA’s implementation in all four cities and its early effects on savings and other financial outcomes in two cities: New York City and Tulsa. In these latter cities, a randomly selected half of the tax filers who were interested in SaveUSA in 2011 could open accounts (the “SaveUSA group”), but the other half could not (the control group). The report compares the savings and other financial behaviors of the two groups over time to estimate SaveUSA’s effects. The findings thus suggest the effects that savings policies structured similarly to SaveUSA might have.SaveUSA’s operation and evaluation are funded through the federal Social Innovation Fund (SIF), a public/private partnership administered by the Corporation for National and Community Service. This particular SIF project is led by the Mayor’s Fund to Advance New York City and the NYC Center for Economic Opportunity (CEO) in collaboration with MDRC. Matching funds required by the SIF were provided by several foundations and organizations. CEO, with the New York City Department of Consumer Affairs Office of Financial Empowerment (OFE), which conceived and launched an early version of the model, leads SaveUSA operations; MDRC is conducting the program’s evaluation.Key Findings: SaveUSA was implemented successfully in all four cities. During the first program year, individuals in the SaveUSA group directly deposited an average of $506 of their tax refunds into SaveUSA accounts.About two-thirds of those in the SaveUSA group saved for about a year and received a first savings match, which averaged $291 among those who received it. About two-fifths of the SaveUSA group pledged to save part of their tax refund again in the program’s second year.At the 18-month follow-up point, SaveUSA had increased the percentage of individuals with any short-term savings (by 7 percentage points) and increased the total amount of savings individuals held on average (by $512), compared with what they would have saved without the program. The program also had increased the proportion of those who expressed a continued commitment to save.No effects were found on individuals’ amount of debt, material hardship, or other aspects of financial security over the 18-month follow-up period.A subsequent report in late 2015 will examine SaveUSA’s effects over 36 to 42 months and will present a much more complete assessment of whether SaveUSA can sustain savings and improve individuals’ overall financial well-being.

The elasticity of taxable income of high earners: evidence from Hungary

The paper studies how high-income taxpayers responded to the introduction of the “extraordinary tax on individuals” in Hungary in 2007. The study is based on a panel of tax returns containing information on 10 % of tax filers from 2005 and three subsequent years. We estimate the elasticity of taxable income with respect to the marginal net-of-tax rate and find that the taxable income of Hungarian high earners is moderately responsive to taxation: the estimated elasticity is about 0.24. We also find evidence for a sizeable income effect. The estimated effect is not caused by income shifting.

Reforming the Mortgage Interest Deduction

The $69 billion mortgage interest deduction (MID) is often viewed as an element of the tax code that promotes middle-class prosperity. However, 64 percent of the benefits, as measured by effective tax reduction, goes to households earning more than $100,000 per year. The large variation in nominal benefits is one of the reasons why many economists state that the MID is regressive. High-income earners average a tax benefit nearly nine times greater than a tax filer earning $50,000-$100,000. The effective tax reduction of the MID per return among tax filers earning between $100,000 and $200,000 is $1,420. That is still nearly 10 times larger than the $150 saved by taxpayers earning between $30,000 and $50,000. With 65.2 percent of all tax filers claiming to make less than $50,000, only 9.8 percent of these returns used the mortgage interest deduction. In order to create a simpler, more efficient tax code, policymakers should take care to effectively align tax policy with housing objectives.

VITA Experiential, Service-Learning, Learned Competencies, And Changed Mindsets

The authors describe how Southern Utah University has integrated the U.S. Internal Revenue Service (IRS) Voluntary Income Tax Assistance (VITA) program as an experiential service-learning activity for over a decade and a half. First, we describe the value of experiential service-learning. Second, we detail the program, its oversight, its student volunteers, and its purposes. Third, we provide a quantitative assessment of professional competencies based on a sample of 29 recent VITA student volunteers. Fourth, we describe a qualitative analysis of VITA student volunteers perceptions of their participation using content analysis of written essays. And last, we provide a qualitative analysis of 71 tax-clients perceptions of their participation in the program, again using content analysis. Based on our experiences and these results, we conclude that the VITA program is demonstrably beneficial for the institutions social responsibility for benefitting both the student volunteers professional development and communitys lower-income tax filers.

Navigating work disability paradigms and reform in Canada

Objective: We investigate labour-market earnings of workers’ compensation claimants from three distinctly different workers’ compensation insurance support programs for claimants with permanent impairments. These three programs, which existed in Ontario, Canada in different periods over the last 25 years, are the Permanent Disability (PD) program, the Future Economic Loss (FEL) program, and the Loss of Earnings (LOE) program. The nature of benefit determination and the return to work supports provided by three programs are very different. The focus of the study is on evidence of programmatic impact on labour-market earnings recovery trajectories over nine years post injury.Methods: The study included claimants sampled from each of the three programs who sustained a permanent impairment from a work injury. Claimants were identified in a Revenue Canada tax file database known as the Longitudinal Administrative Databank (LAD), which is a longitudinal 20% simple random sample of all Canadian tax filers. Each claimant was matched with similar uninjured controls that were also in the LAD, based on sex, age, labour-market earnings amounts and trajectories in the four years prior to injury, and a propensity score. Statistical modeling analysis was undertaken to compare the labour-market earnings trajectories of claimants relative to their matched controls using data on earnings over the nine years post injury. Analyses focused on sub-strata defined by program, sex, age, permanent impairment level, and pre-injury earnings. A key issue of interest was to determine which program of supports resulted in the best labour-market earnings recovery.Results: Five distinct earnings recovery trajectories were identified. Claimants in various demographic and pre-injury earnings sub-strata from the LOE program cohort had a statistically significant lower probability of the lowest earnings recovery trajectory, and higher probability of the second highest trajectory compared to the PD cohort. Results for the LOE program were similar to the FEL program.Conclusions: Injured workers from the LOE program appear to fare better than claimants from the PD program and similarly to those from the FEL program in terms of labour-market earnings recovery over the nine years post injury. Across all programs, older claimants fare more poorly, and women fare worse than men in terms of labour-market earnings recovery.

The impact of work injury and permanent impairment on the probability of poverty

Objectives: We investigate the prevalence of poverty across different workers compensation programs using large representative samples of workers’ compensation claimants who have sustained a permanent impairment from a work injury. The programs, which have existed in the provinces of Ontario and British Columbia, Canada over the last 25 years, are the Permanent Disability (PD) program, the Future Economic Loss (FEL) program, the Loss of Earnings (LOE) program, and the Bifurcated Benefits (BB) program. The nature of benefit determination and the return to work supports provided by the four programs are very different. The focus of the study is on evidence of programmatic impact on the probability of poverty in the nine years post injury.Methods: The study included claimants sampled from each of the four programs who sustained a permanent impairment from a work injury. Claimants were identified in a Revenue Canada tax database know as the Longitudinal Administrative Databank (LAD), which is a longitudinal 20% simple random sample of all Canadian tax filers. Each claimant was matched with similar uninjured controls that were also in the LAD, based on sex, age, labour-market earnings amounts and trajectories in the four years prior to injury, family income, marital status, number of children, and a propensity score. Descriptive analysis was undertaken to compare near poverty, poverty and deep poverty levels of claimants relative to their match controls using data on family and individual earnings over a ten-year period post injury. Statistical modeling was used to determine the probability of poverty and near poverty for claimants versus controls. A key issue of interest was to determine was whether the probability of poverty differed between programs.Results: Based on after-tax adjusted family income, the level of poverty was quite low, less than 2% in every program over a ten-year period. The level of poverty was also lower for claimants than their matched controls, but only nominally so. The BB program had the lowest proportion of poverty followed by the PD program, the FEL program and then the LOE program. In the statistical modelling analysis male claimants did not have a higher probability of poverty compared to controls, though female claimants did. Both male and female claimants had a higher probability of near poverty.Conclusions: Poverty levels are very low for workers’ compensation claimants who sustain permanent impairments from a work injury across different programs and time periods in Ontario and British Columbia. Overall the Bifurcated Benefits program from British Columbia had the lowest proportion of claimants in poverty in absolute terms and relative to non-injured workers. Increased levels of poverty due to work injury and permanent impairment are particularly a concern for female claimants, though both female and male claimants have a higher chance of near poverty compared to non-injured workers.

Work disability trajectories under three workers’ compensation programs

Objective: We investigate labour-market earnings of workers’ compensation claimants from three distinctly different workers’ compensation insurance support programs for claimants with permanent impairments. These three programs, which existed in Ontario, Canada in different periods over the last 25 years, are the Permanent Disability (PD) program, the Future Economic Loss (FEL) program, and the Loss of Earnings (LOE) program. The nature of benefit determination and the return to work supports provided by three programs are very different. The focus of the study is on evidence of programmatic impact on labour-market earnings recovery trajectories over nine years post injury.Methods: The study included claimants sampled from each of the three programs who sustained a permanent impairment from a work injury. Claimants were identified in a Revenue Canada tax file database known as the Longitudinal Administrative Databank (LAD), which is a longitudinal 20% simple random sample of all Canadian tax filers. Each claimant was matched with similar uninjured controls that were also in the LAD, based on sex, age, labour-market earnings amounts and trajectories in the four years prior to injury, and a propensity score. Statistical modeling analysis was undertaken to compare the labour-market earnings trajectories of claimants relative to their matched controls using data on earnings over the nine years post injury. Analyses focused on sub-strata defined by program, sex, age, permanent impairment level, and pre-injury earnings. A key issue of interest was to determine which program of supports resulted in the best labour-market earnings recovery.Results: Five distinct earnings recovery trajectories were identified. Claimants in various demographic and pre-injury earnings sub-strata from the LOE program cohort had a statistically significant lower probability of the lowest earnings recovery trajectory, and higher probability of the second highest trajectory compared to the PD cohort. Results for the LOE program were similar to the FEL program.Conclusions: Injured workers from the LOE program appear to fare better than claimants from the PD program and similarly to those from the FEL program in terms of labour-market earnings recovery over the nine years post injury. Across all programs, older claimants fare more poorly, and women fare worse than men in terms of labour-market earnings recovery.

Encouraging Savings for Low- and Moderate-Income Individuals: Preliminary Implementation Findings from the SaveUSA Evaluation

SaveUSA, a pilot program in New York City, Newark, San Antonio, and Tulsa, offers a matched savings account to low-income tax filers, building on the opportunity presented by tax-time refunds, especially the Earned Income Tax Credit. This 12-page brief offers early implementation findings.

Changes in Income Inequality Among U.S. Tax Filers between 1991 and 2006: The Role of Wages, Capital Income, and Taxes

This paper examines changes in after-tax income inequality among tax filers between 1991 and 2006. In particular, how changes in wages, capital income, and tax policy contribute to changes in income inequality is investigated. To examine the role of these three possible contributors to the increase in income inequality, the Gini coefficient is decomposed by income source using the method developed by Lerman and Yitzhaki (1985). The Gini coefficient of after-tax income increased by 15 percent (0.071 points) between 1991 and 2006. By far, the largest contributor to this increase was changes in income from capital gains and dividends. Changes in wages had an equalizing effect over this period as did changes in taxes. Most of the equalizing effect of taxes took place after the 1993 tax hike; most of the equalizing effect, however, was reversed after the 2001 and 2003 Bush-era tax cuts. Similar results are obtained with other inequality measures.

Class Warfare, Republican Style

Republicans frequently criticize Democrats for when they suggest raising taxes on the rich. But Republicans also engage in class warfare by regularly attacking the close to half of all federal income tax filers with no tax liability. They imply that this is a major source of the budget deficit, but never acknowledge that those in the top 1 percent of the income distribution made 54 percent more than the entire bottom half of the income distribution combined.

Unwilling or Unable to Cheat? Evidence From a Tax Audit Experiment in Denmark

This paper analyzes a tax enforcement field experiment in Denmark. In the base year, a stratified and representative sample of over 40,000 individual income tax filers was selected for the experiment. Half of the tax filers were randomly selected to be thoroughly audited, while the rest were deliberately not audited. The following year, threat-of-audit letters were randomly assigned and sent to tax filers in both groups. We present three main empirical findings. First, using baseline audit data, we find that the tax evasion rate is close to zero for income subject to third-party reporting, but substantial for self-reported income. Since most income is subject to third-party reporting, the overall evasion rate is modest. Second, using quasi-experimental variation created by large kinks in the income tax schedule, we find that marginal tax rates have a positive impact on tax evasion for self-reported income, but that this effect is small in comparison to legal avoidance and behavioral responses. Third, using the randomization of enforcement, we find that prior audits and threat-of-audit letters have significant effects on self-reported income, but no effect on third-party reported income. All these empirical results can be explained by extending the standard model of (rational) tax evasion to allow for the key distinction between self-reported and third-party reported income.

Should the Government Prepare Individual Income Tax Returns?

Some analysts have argued that return-free filing systems, such as those used in other countries and in California, could substantially reduce the costs for many individual taxpayers with relatively simple returns at little or no net administrative cost to the government. There is substantial uncertainty as to how a federal return-free system would affect the costs of government and individual tax filers. California’s program appears to have reduced the state’s administrative costs, but the net savings are largely attributable to e-filing rather than to the return-free system itself. The vast majority of California’s eligible filers have declined to use it (only 3.2 percent do), suggesting that most people believe the savings they would realize in time and out-of-pocket spending would be outweighed by the costs, including risks to privacy and security. A return-free tax system would increase third-party tax compliance costs - those of employers, financial institutions and other payers of income to individuals - largely because reporting deadlines would have to be advanced in order to provide timely returns and tax refunds. Calculations of such costs range from $500 million to as much as $5 billion, offsetting or exceeding any potential savings for taxpayers or for government. Added costs would fall disproportionally on small businesses. Return-free filing would introduce policy concerns including: conflict of interest for the IRS in functioning as tax preparer and enforcer; increased risks of error; taxpayers becoming less cognizant of the tax code and their personal finances; taxpayers unwilling to challenge an IRS document retaining liability for errors; privacy; security; and reduced incentives for investment in innovation.

Paying to Save: Tax Withholding and Asset Allocation among Low- and Moderate-Income Taxpayers

We analyze the phenomenon that low- and moderate-income (LMI) tax filers exhibit a for over-withholding their taxes, a measure we derive from a unique set of questions administered in a dataset of 1,003 households, which we collected through the Survey Research Center at the University of Michigan. We argue that the relationship between their withholding preference and portfolio allocation across liquid and illiquid assets is consistent with models with present-biased preferences, and that individuals exhibit self-control problems when making their consumption and saving decisions. Our results support a model in which individuals use commitment devices to constrain their consumption. Using data on other tax-filing behaviors, we also show that mental accounting and loss aversion explanations for tax filers' for over-withholding are unlikely to explain the patterns in the data. Present-biasedness and dynamic inconsistency among LMI tax filers have important implications for saving policies and tax administration.

Paying to Save: Tax Withholding and Asset Allocation among Low- and Moderate-Income Taxpayers

We analyze the phenomenon that low- and moderate-income (LMI) tax filers exhibit a "preference for over-withholding" their taxes, a measure we derive from a unique set of questions administered in a dataset of 1,003 households, which we collected through the Survey Research Center at the University of Michigan. We argue that the relationship between their withholding preference and portfolio allocation across liquid and illiquid assets is consistent with models with present-biased preferences, and that individuals exhibit self-control problems when making their consumption and saving decisions. Our results support a model in which individuals use commitment devices to constrain their consumption. Using data on other tax-filing behaviors, we also show that mental accounting and loss aversion explanations for tax filers' "preference for over-withholding" are unlikely to explain the patterns in the data. Present-biasedness and dynamic inconsistency among LMI tax filers have important implications for saving policies and tax administration.

Paying to Save: Tax Withholding and Asset Allocation Among Low-and Moderate-Income Taxpayers

We analyze the phenomenon that low-and moderate-income (LMI) tax filers exhibit a "preference for over-withholding" their taxes, a measure we derive from a unique set of questions administered in a dataset of 1,003 households, which we collected through the Survey Research Center at the University of Michigan. We argue that the relationship between their withholding preference and portfolio allocation across liquid and illiquid assets is consistent with models with present-biased preferences, and that individuals exhibit self-control problems when making their consumption and saving decisions. Our results support a model in which individuals use commitment devices to constrain their consumption. Using data on other tax-filing behaviors, we also show that mental accounting and loss aversion explanations for tax filers' "preference for over-withholding" are unlikely to explain the patterns in the data. Present-biasedness and dynamic inconsistency among LMI tax filers have important implications for saving policies and tax administration.

Tax Refunds and Microbusinesses: Expanding Family and Community Wealth Building in the Borderlands

The Earned Income Tax Credit (EITC) is the largest antipoverty fiscal policy program for working families administered by the Internal Revenue Service (EITCs totaled $42 billion in 2003). For the 2004 tax season, U.S.-Mexico border county EITC refunds reached $1.9 billion while total tax refund amounts for low-income borderlands families topped $2.6 billion. Questionnaires administered during the tax-filing season to working families in Texas, New Mexico, Arizona, and California border counties collected more than forty-five hundred surveys that canvassed respondents on a variety of financial behaviors and tax refund expenditures. Additionally, researchers recorded data on tax filers using their tax refunds to capitalize microbusinesses and respondents' desires to know more about operating a microbusiness. Empirical analysis employing logistic regression produces results that parallel previous findings in the literature and suggests actionable policy prescriptions that may support family and community entrepreneurial activities in the borderlands.

Income taxes and the destination of movers to multistate MSAs

We examine how differences in state income tax rates, as well as other state and local taxes and public service expenditures, influence the choice of state of residence for households (federal tax filers) moving into multistate metropolitan areas (MSAs) using data from the IRS on the migration of taxpayers. MSAs that are on borders provide a spatial discontinuity—discrete differences in state tax rates within a single labor market. These MSAs allow residents to live in one state and work in another state. We find that differences in state income tax rates have a significant impact on the relative rate of migration to the states within an MSA. However, contrary to what would be expected, this impact is only significant in MSAs in which the filing state is based on employment (states without reciprocity) and not for those states in which the filing state is the state of residence (states with reciprocity). In MSAs where states do not have reciprocity agreements, a difference of ten percent in tax rates leads to a 4.1 percent difference in the relative rate of incoming taxpayers. Analogously, we find that a ten percent difference in state tax rates in these MSAs results in a 3.3 percent difference in the rate of tax base inflow (AGI). Our results suggest that one reason that differences in state income taxes appear to have more impact in multistate MSAs without reciprocity is that only relatively large differences in state income tax rates have any impact on migration and these differences are much more pronounced in MSAs without reciprocity.

Marginal Tax Rates Facing Low– and Moderate–Income Workers Who Participate in Means–Tested Transfer Programs

The combination of a progressive tax system with credits for low-income workers and means-tested transfer programs can create high marginal tax rates (MTRs) on earned income. We document the extent and distribution of statutory and actual MTRs for Wisconsin households with earned income in 2000 using a unique data set of merged tax, transfer program, and wage data. Nearly a quarter of unmarried tax filers with two or more dependents face MTRs of 50 percent or greater. Households between 100 percent and 250 percent of the federal poverty threshold and those using multiple means-tested programs are more likely to face high rates.

An Analysis of the Use of Education Tax Credits at Four Public Community Colleges

This study examined the use of education tax credits at four community colleges using data from the Federal Quality Assurance Program in 1998, the first year of the HOPE Scholarship and Lifetime Learning Tax Credit (LLTC). Preliminary estimates indicated that the two tax credits were expected to primarily benefit middle income tax filers with adjusted gross incomes (AGI) falling between $40,000 and $80,000. Also, claimants were not expected to benefit from the Federal Pell Grant program. Of the sample of federal 1998 tax returns examined in this study, only 11.2% claimed a HOPE/LLTC, averaging $859. In addition, the average AGI of claimants was $35,867, with approximately 59% of AGI levels falling below $40,000. This study also examined Federal Pell Grant and Earned Income Tax Credit (EITC) use to determine to what extent lower income tax filers are claiming the HOPE/LLTC. The results indicate that approximately 58% of student HOPE/LLTC claimants also received Pell, averaging $1,775, while 14% of independent student and parent HOPE/LLTC claimants also claimed an EITC, averaging $924. Other variables examined include use of a paid tax preparer or self-preparation (by hand vs. tax software). The results indicate that a larger percentage of the HOPE/LLTC came from lower income levels than originally projected. While the results of this study are limited and only examine data elements from a financial aid filer database, the information can be useful to policy makers in determining if the HOPE/LLTC is benefiting taxpayers in accordance with the policy's intent.