TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Sunday, September 1, 2013

Taxpayer Search for Information: Implications for Rational Attention

Jeffrey L. Hoopes (Ohio State University, Department of Accounting & Management Information Systems), Daniel H. Reck (University of Michigan, Department of Economics) & Joel B. Slemrod (University of Michigan, Stephen M. Ross School of Business), Taxpayer Search for Information: Implications for Rational Attention:

Prior literature has largely taken taxpayer knowledge of the tax system as given. However, at some point, taxpayers must acquire information in order to respond to, and comply with, tax laws. Using the capital gains tax as a focal case, we examine novel information search data from capital-gains-tax-related Google searches, Wikipedia Page Views, aggregate phone calls to the IRS, aggregate visits to IRS web pages, and aggregate searches conducted on the IRS’s webpage. We find strong seasonality in taxpayer information search resulting from a surge in search behavior around tax filing deadlines. This evidence suggests that taxpayers seek information to comply with their tax obligations. We also find evidence that taxpayers search for tax-related information for tax planning purposes. Specifically, we document a year-end ramp-up in capital-gains-tax-related information search, especially searches related to the treatment of capital losses in years following down markets. Capital-gains-tax-related information search co-varies with stock market trading volume, and with Google searches for stock advice, suggesting that taxpayers simultaneously trade and investigate the tax implications of their trading. Finally, we find substantial taxpayer information search around tax events unrelated to either compliance or planning, such as political and news stories related to capital gains taxation. Overall, the data suggest that taxpayers are not fully informed at all times, but that rational attention and exogenous shocks to tax salience drive information search by taxpayers.

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