Why Do People Give Interest-Free Loans to the Government? An Experimental Study of Interim Tax Payments

Abstract

U.S. taxpayers remit substantial interim tax overpayments. This study uses a case-based experiment with 162 experienced M.B.A.-student volunteers to investigate taxpayer preferences for excess interim tax remittances in the absence of default withholding rules, transaction costs, and other sources of complexity. Findings indicate that even if taxpayers are given full discretion for the amounts paid, 43 percent indicate a preference to pay more than a known minimum amount. Further analysis indicates that the degree of uncertainty associated with estimating the current-year tax liability significantly increases the propensity to overpay on an interim basis, but that this effect diminishes with taxpayer experience. Preferences are robust to whether taxes are remitted as withholding from wages or as direct payments of estimated taxes. Findings are consistent with behavioral theories that explain why individuals' intertemporal choices may not strictly adhere to a positive time value of money.