Could Increasing the Frequency of Estimated Tax Payments Decrease Delinquency Rates Among the Self-Employed?

Abstract

Self-employed business owners are far less compliant in reporting and paying their taxes than wage earners (employees). Discounted utility theory suggests that people act rationally and would not be willing to prepay an upcoming obligation. Mental accounting and behavioral economics theory take a different view, asserting that taxpayers will prefer a pay-as-you-go pattern (i.e., regularity). In response to these opposing theories, we conducted a behavioral experiment to see if a taxpayer who is given the opportunity to pay estimated federal income taxes monthly (instead of quarterly) will do so, and also whether they are less delinquent than those in the control group, who paid estimated federal income taxes quarterly. Our results indicate that when respondents were explicitly offered the opportunity to make monthly rather than only quarterly payments, the majority of the respondents opted to make monthly prepayments at least once. Additionally, those with an explicit option to pay as often as monthly rather than quarterly had significantly fewer dollars of delinquency. Paying more frequently could alleviate some budgeting pressures for the self-employed and result in fewer delinquencies to be collected at the federal level.

Citation

Chambers, V. and Curatola, A.P. (2012), "Could Increasing the Frequency of Estimated Tax Payments Decrease Delinquency Rates Among the Self-Employed?", Stock, T. (Ed.) Advances in Taxation (Advances in Taxation, Vol. 20), Emerald Group Publishing Limited, Leeds, pp. 1-28. https://doi.org/10.1108/S1058-7497(2012)0000020004