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Subjective Costs of Tax Compliance

By Jonathan H. Choi and Ariel Jurow Kleiman. Full Text.

This Article introduces and estimates the “subjective costs” of tax compliance, which are costs of tax compliance that people experience directly and individually. To measure these costs, we conducted a survey experiment assessing how much taxpayers would pay to reduce the unpleasantness associated with filing a tax return. The experiment revealed that taxpayers are more concerned about inadvertent mistakes in their tax filings than the time spent on compliance. Respondents also only ascribed meaningful value to eliminating all tax compliance work; they ascribed essentially no value to marginal time savings. Additionally, taxpayers were indifferent between simplification services offered by a private company versus the government.

These findings have important implications for theory and policy. From a theoretical perspective, these survey results call into question the nearly universal practice of using market wages to monetize the time that people spend on tax compliance work. Indeed, our results suggest that people value their tax compliance time at a rate much lower than their hourly wage. Regarding policy, these findings counsel policymakers to think big when it comes to reducing tax compliance costs and to focus on simplifications that reduce mistakes rather than merely saving time. They also suggest that policymakers need not be overly concerned about mistrust of government in the context of tax simplification and automation services.