Third-Party Tax Administration: The Case of Low- and Moderate-Income Households

Using a unique household-level data set, this article investigates the taxfiling experiences and refund behavior of low- and moderate-income (LMI) households. We document households\u27 tax-filing behavior, attitudes about the withholding system, use of tax refunds to consume and save, and the mechanisms by which households would prefer to receive their income. We also document the prevalence of the use of tax-preparation services and the receipt of tax refunds and refund-anticipation loans. Finally, we argue that there may be a role for tax administration to enable LMI households to make welfare-improving financial decisions

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

Recently, researchers have begun to examine the financial service patterns of low- and moderate-income households. These behaviors are of interest because high cost financial services, barriers to saving, the lack of insurance, and credit constraints contribute to poverty and other socioeconomic conditions . Many low- and moderate-income households use alterna­tive financial service (AFS) providers, such as check cashers, for their financial services needs. Tax preparation firms are among the important financial service providers in the lives of low-income households. Such firms help households navigate the complicated process of filing their taxes, and many low-income households obtain sizeable tax refunds. At the same time, tax preparation is costly, and many tax preparation firms offer refund antici­pation loans and similar products that add to the costs and complexity of tax filing. In this paper, we examine financial service patterns among low- and moderate-income house­holds as these patterns relate to the tax system and the process of filing one\u27s taxes. 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 house­ holds 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\u27 financial services patterns and their use of AFS providers. Third, many low- and moderate-income house-holds 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

Exploring the Determinants of High-Cost Mortgages to Homeowners in Low- and Moderate-Income Neighborhoods

In spite of the recent impetus to reform home mortgage markets, particularly as they affect low- and moderate-income (LMI) households, little systematic evidence is available about how potential abuses in mortgage lending manifest in the mortgages held by those households. While racial discrimination in mortgage markets has a long history in the United States, the role of mortgage brokers in lending has only recently increased and become controversial. In this chapter, we uncover two mechanisms through which differential mortgage pricing occurs among LMI homeowners: black borrowers and borrowers who use mortgage brokers pay more for mortgage loans than other borrowers, after controlling for a wide variety of factors

Affordability, financial innovation and the start of the housing boom

At their peak in 2005, roughly 60 percent of all purchase mortgage loans originated in the United States contained at least one non-traditional feature. These features, which allowed borrowers easier access to credit through teaser interest rates, interest-only or negative amortization periods, and extended payment terms, have been the subject of much regulatory and popular criticism. In this paper, we construct a novel county-level dataset to analyze the relationship between rising house prices and non-traditional features of mortgage contracts. We apply a break-point methodology and find that in housing markets with breaks in the mid-2000s, a strong rise in the use of non-traditional mortgages preceded the start of the housing boom. Furthermore, their rise was coupled with declining denial rates and a shift from FHA to subprime mortgages. Our findings support the view that a change in mortgage contract availability and a shift toward subprime borrowers helped to fuel the rise of house prices during the last decade

Essays on the effects of devolution.

The United States during the 1990s and early 2000s witnessed a major paradigm shift in the role and scope of the federal government. In particular, Congress' Contract with America and President Clinton's 1996 welfare reform transferred significant responsibilities to state and local governments as well as to individuals, and concurrently reduced the involvement of the federal government in a variety of public programs. In Essays on the Effects of Devolution, I explore the consequences of policy changes enacted during the 1990s and 2000s in order to gauge the economic response of those affected, assess the benefits and burdens of these policies, and glean lessons from these experiences. I study a major funding cut to the National Endowment for the Arts to determine whether individual donors were able to compensate arts organizations for their losses in funding. I also examine the trends in material well-being of low-income mothers before and after welfare reform. As a result of these kinds of devolutionary policies, the federal government has become increasingly reliant on policy tools that are broader in their goals. To address this issue, I study the effect of the dependent exemption and the Earned Income Tax Credit on households' labor supply decisions.Ph.D.EconomicsPublic administrationSocial SciencesUniversity of Michigan, Horace H. Rackham School of Graduate Studieshttp://deepblue.lib.umich.edu/bitstream/2027.42/126014/2/3224867.pd

Does the NEA crowd out private charitable contributions to the arts?

In this paper, I extend a theoretical model of the crowding out hypothesis, whereby government contributions to a public good displace private giving, in order to illustrate how dollar-for-dollar crowding out is possible even when individuals regard their own contributions and government grants as imperfect substitutes. I estimate that private charitable contributions to arts organizations increased by 60 cents to a dollar due to a major funding cut to the National Endowment for the Arts (NEA) during the mid-1990s. These increases, however, also coincided with, on average, a 25 cent increase in fund-raising expenditures by arts organizations for every dollar decrease in government grants. The estimate of crowding out found in this paper is large, particularly for a study using a micro-data set. I argue that an appropriate interpretation of an estimate of a crowding out parameter, in general, depends crucially on the context.Crowding out (Economics) ; Public goods

Third-Party Tax Administration: The Case of Low- and Moderate-Income Households

Using a unique household-level data set, this article investigates the taxfiling experiences and refund behavior of low- and moderate-income (LMI) households. We document households\u27 tax-filing behavior, attitudes about the withholding system, use of tax refunds to consume and save, and the mechanisms by which households would prefer to receive their income. We also document the prevalence of the use of tax-preparation services and the receipt of tax refunds and refund-anticipation loans. Finally, we argue that there may be a role for tax administration to enable LMI households to make welfare-improving financial decisions

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

Recently, researchers have begun to examine the financial service patterns of low- and moderate-income households. These behaviors are of interest because high cost financial services, barriers to saving, the lack of insurance, and credit constraints contribute to poverty and other socioeconomic conditions . Many low- and moderate-income households use alterna­tive financial service (AFS) providers, such as check cashers, for their financial services needs. Tax preparation firms are among the important financial service providers in the lives of low-income households. Such firms help households navigate the complicated process of filing their taxes, and many low-income households obtain sizeable tax refunds. At the same time, tax preparation is costly, and many tax preparation firms offer refund antici­pation loans and similar products that add to the costs and complexity of tax filing. In this paper, we examine financial service patterns among low- and moderate-income house­holds as these patterns relate to the tax system and the process of filing one\u27s taxes. 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 house­ holds 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\u27 financial services patterns and their use of AFS providers. Third, many low- and moderate-income house-holds 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

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.Taxation