Research

Working papers

Paying Taxes Automatically: Behavioral Effects of Withholding Income Tax (Job Market Paper)

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Employers withhold employees' income taxes in nearly all modern tax systems, but the consequences of this arrangement are not well understood. I use IRS administrative data to study how much late payment withholding prevents and why. Exploiting a policy change, I find that withholding reduces late payment substantially. If people pay late because of liquidity constraints, withholding may place harmful limits on their choice to pay late. Yet the liquidity-constraint explanation is inconsistent with evidence that people earning interest income, who are unlikely to be liquidity-constrained, respond just as much to the policy change. Withholding may also help people to avoid the costs and frictions they face when making on-time payments for themselves. Consistent with frictions, I find that late payers make more errors on their tax returns. My findings suggest that withholding both eases the administrative burden of collecting late taxes and benefits taxpayers by making payment automatic.

Heard it through the Grapevine: Direct and Network Effects of a Tax Enforcement Field Experiment (with John Guyton, Ronald R. Hodge II, and Joel Slemrod). NBER Working Paper No. 24305

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Tax enforcement may affect both the behavior of those directly treated and of some taxpayers not directly treated but linked via a network to those who are treated. A large-scale randomized field experiment enables us to examine both the direct and network effects of letters and in-person visits on withheld income and payroll tax remittances by at-risk firms. Visited firms remit substantially more tax. Their tax preparers’ other clients also remit slightly more tax, while their subsidiaries remit slightly less. Letters have a much smaller direct effect and no network effects, yet may improve compliance at lower cost.