Wednesday, July 4, 2012
We provide survey evidence regarding taxpayer perceptions of two important tax expenditures — the charitable contribution deduction (CD) and the home mortgage interest deduction (HMID). We find that taxpayers have a flawed understanding of both programs. Taxpayers underestimate their eligibility for tax benefits for giving charitable gifts. Conditional on being eligible for CD, taxpayers also underestimate the size of the tax benefits. For the HMID, there are many eligible taxpayers who do not believe they receive a benefit, and many ineligible taxpayers who falsely believe they receive one. Conditional on qualifying for HMID, taxpayers underestimate the size of the tax benefits. Errors are prevalent even in the highest income categories. The results cast doubt on conventional understandings of the elasticity of charitable giving and home purchasing to tax expenditures. Moreover, the results suggest that even salient tax expenditures may be a particularly flawed means of subsidizing desirable behavior.