Abstract
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. Dynamic inconsistency among LMI tax filers has important implications for saving policies and for tax administration at large.
Disciplines
Banking and Finance Law | Economics | Law and Economics | Public Law and Legal Theory | Social Welfare Law | Taxation-Federal
Date of this Version
November 2007
Working Paper Citation
Barr, Michael S. and Dokko, Jane, "Paying to Save: Tax Withholding and Asset Allocation among Low- and Moderate-Income Taxpayers" (2007). Law & Economics Working Papers Archive: 2003-2009. 79.
https://repository.law.umich.edu/law_econ_archive/art79
Included in
Banking and Finance Law Commons, Economics Commons, Law and Economics Commons, Public Law and Legal Theory Commons, Social Welfare Law Commons, Taxation-Federal Commons