An Investigation of Why Taxpayers Prefer Refunds: A Theory of Planned Behavior Approach

Abstract

Approximately 80 percent of individual tax returns filed with the IRS result in refunds. According to 2003 Statistics of Income data, these refunds average approximately $2,400. In effect, over-withholding of federal income taxes results in interest-free loans to the government, creating opportunity costs to taxpayers equal to the amount of forgone interest income. This study examines the underlying reasons why taxpayers tend to make tax payments that ultimately result in a tax refund. We draw on Ajzen’s (1991) Theory of Planned Behavior to comprehensively model this phenomenon. Overall, the results from 140 respondents show taxpayers’ attitudes (e.g., desire to avoid uncertainty or to avoid any chance of underpayment) and subjective norms (e.g., perceptions of friends’ likely advice) affect their withholding decisions. Although respondents understand that they are forgoing investment income and perceive that they could change their withholding with relative ease, they are still hesitant to reduce their overpayment of taxes. It appears that taxpayers perceive emotional benefits (e.g., ‘‘enjoyment’’ of refund check, reduced anxiety) from over-withholding that equal or offset the financial costs.