Why Donâ€™t Taxpayers Maximize their Tax-Based Student Aid? Salience and Inertial in Program Selection
AbstractThe federal government offers an array of tax-based aid student aid programs designed to lower the cost of postsecondary attendance. Many taxpayers are eligible for more than one program, yet they are limited to one program per student per year. Analyzing a unique panel dataset of individual income tax returns from the U.S. Internal Revenue Service, I find that many taxpayers do not select the single tax-based aid program that offers the largest reduction in combined federal and state taxes. In this paper, I offer three explanations for this pattern of taxbased aid selection. First, I show that salience of federal tax effects causes some taxpayers to select a program that minimizes federal taxes rather than combined state and federal taxes. Second, I show that inertia in program selection causes some taxpayers to default into options offering a smaller reduction in tax liability. Third, I find evidence that suggests some non taxminimizing claims are cases of tax evasion.
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Bibliographic InfoPaper provided by Department of Economics, UC San Diego in its series University of California at San Diego, Economics Working Paper Series with number qt0pb3f440.
Date of creation: 15 Jul 2010
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tax salience; inertia; default behavior; tax evasion; tax-based student aid; Social and Behavioral Sciences;
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