We previously blogged Todd Zywicki's post on The Volokh Conspiracy (via InstaPundit) that fingered tax liabilities as the #1 cause of bankruptcies. Bankruptcy guru Elizabeth Warren (Harvard) is kind enough to share her views on the subject with our readers:
Reed Shuldiner sent me a cross-listed post in which Professor Todd Zywicki claimed that “as much as 10% of all bankruptcy filings are caused by tax liabilities.” I couldn’t find a source for this claim, but the question is an interesting one. My coauthors and I have tried to gather some data on it.
So far as we can tell, consumer debtors rarely identify tax problems as the reason for filing bankruptcy. When we asked people an open-ended question in 1991 about why they filed for bankruptcy, about 2.9% of the families identified a problem with the taxing authorities. (People could list more than one reason; “taxes” was well outside the top ten reasons.) About 17.9% indicated in their court records that they owed some back taxes, but we infer that most people weren’t feeling the lash of aggressive IRS collection tactics.
The story seems different for businesses. We sampled business debtors (both live human beings and corporate entities) that filed for business bankruptcies in 1994. The result? Taxes were the fourth most frequently cited reason for filing, mentioned by one in every five debtors. The debtors described IRS seizures and other collection actions that they claimed caused them to file for bankruptcy.
We continue to collect data on taxes owed when people file for bankruptcy. Let us know if this is interesting to anyone on the list.
Update: Todd Zywicki at The Volokh Conspiracy responds:
TaxProf Blog took note of my post a few weeks back on taxes and bankruptcy filings. I observed that there was little good empirical evidence on the effect of tax liabilities on bankruptcy, but that tax liaiblities are a factor in as much as 10% of bankruptcy filings, more than college expenses, death in the family, or gambling. The source for this was a Gallup Poll in 1997 (which I cited in my 1999 article with Edith Jones on means-testing in bankrutpcy), the results of which are reproduced in Vern McKinley's Regulation article here.
Just to make clear, I didn't say that taxes were the #1 cause of bankruptcy filings (as TaxProf summarized what I said), nor do I believe that is the case. What I said is that tax liabilities may be an understudied and underappreciated cause of bankruptcy filings. This would be especially the case if the effect of taxes on causing bankruptcy were defined as broadly as the effect of some other factors that cause bankruptcy have been defined. Moreover, if we take into account the effect of taxes on income and savings, as well as the fact that taxes are nondischargeable in bankruptcy and so are likely to be paid by strategic debtors who allow other dischargeable debts to go unpaid, then the relationship may be even greater.
Overall, my bottom line observation is that we really don't have good data on the relationship between taxes, household finances, and bankruptcy filings, and that it is worth exploring in more detail.