The Return on Investments in Tax Planning for Employees: Evidence from Germany

Abstract

Tax preparation firms advertise their services as a way to save taxes. Along this line, we use a large cross-sectional sample of German income tax accounting data, consisting of employees and other taxpayers with non-business income, to explore the relationship between expenses for tax preparation and tax liabilities. We find a negative link with expenses exceeding estimated tax savings. Specifically, one additional Euro yields estimated tax savings of only 75 Cents which implies that individual tax planning is no profitable investment from a tax saving perspective. In consideration of time savings, tax planning is worthwhile only for high income groups. This result suggests for most taxpayers an overinvestment. Potential explanations include an overvaluation of time and tax savings or a benefit of tax planning beyond these savings.

Keywords: tax planning, response to taxation, tax advisors, tax return preparation

JEL Classification: H24, H31