Paying to save: tax withholding and asset allocation among low- and moderate-income taxpayers

Michael S. Barr and Jane K. Dokko
Additional contact information
Michael S. Barr: https://www.federalreserve.gov/aboutthefed/bios/board/barr.htm

No 2008-11, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

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. Present-biasedness and dynamic inconsistency among LMI tax filers have important implications for saving policies and tax administration.

Keywords: Taxation (search for similar items in EconPapers)
Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.federalreserve.gov/pubs/feds/2008/200811/200811abs.html (text/html)
http://www.federalreserve.gov/pubs/feds/2008/200811/200811pap.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2008-11

Access Statistics for this paper

More papers in Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.) Contact information at EDIRC.
Bibliographic data for series maintained by Ryan Wolfslayer ; Keisha Fournillier ().