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November 11, 2007

Empirical Paper on Tax Withholding by Low and Moderate Income Taxpayers

Courtesy of the Legal Scholarship Blog, Michael S. Barr & Jane K. Dakko presented their paper, Paying to Save: Tax Withholding and Asset Allocation Among Low- and Moderate-Income Taxpayers (available from SSRN), at the 2nd Annual Conference on Empirical Legal Studies at NYU on Saturday.  Though not a typical "poverty law" paper (hard to define as typical may be), the paper's abstract is:

We analyze the phenomenon that low- and moderate-income (LMI) tax ¯lers over-
whelmingly exhibit a \preference for over-withholding" their taxes, a measure we derive
from a unique set of questions administered in a proprietary 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 al-
location across liquid and illiquid assets is more consistent with a model of dynamic
inconsistency, and that individuals exhibit self-control problems when making their con-
sumption and saving decisions. Our results support a model in which individuals use
commitment devices to constrain their consumption. Using data on other tax-¯ling
behaviors, we also reject mental accounting and loss aversion explanations for tax ¯lers'
\preference for over-withholding." Dynamic inconsistency among LMI tax ¯lers has
important implications for pro-saving and asset-building policies, and for tax adminis-
tration at large.

-E.R. erosser@wcl.american.edu

November 11, 2007 | Permalink


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