Is Tax Avoidance By the Wealthy Contagious?

Among Dallas property taxpayers, it appears not. Nonwealthy became more motivated to challenge a tax bill by the prospect of savings

America’s convoluted tax code offers multitudes of loopholes to legally reduce one’s tax bill, and it’s no secret that the nation’s richest are particularly good at exploiting them. Stories of billionaires, profitable corporations and at least one wealthy president paying no tax at all on their earnings are no longer surprising. Tax avoidance strategies allow extremely wealthy households to pay, on average, lower effective tax rates than most lesser earners.

How do the less-than-wealthy feel about this? Does the knowledge that the wealthiest routinely pursue tax avoidance inspire the millions of other taxpayers to search out and exploit loopholes for themselves? Will it in the future? 

A corrosive, widescale culture of avoiding taxes — legally or not — would of course further darken the federal government’s fiscal prospects. As Democrats and Republicans have in recent years argued, respectively, for a robust and a weakened Internal Revenue Service, it set off a debate on whether the U.S. would join less wealthy countries weakened by noncompliance among their citizens.

University of Michigan’s Justin E. Holz, UCLA Anderson’s Ricardo Perez-Truglia and University of Texas Dallas’ Alejandro Zentner use property tax protests in Dallas County to explore these questions in a working paper.

Feelings About Evaders and Avoiders

The researchers quizzed subjects about their attitudes toward a range of tax evasion (illegal) and avoidance (legal) behaviors. “Each type of tax avoidance or evasion is consistently rated as substantially less acceptable when undertaken by someone in the richest 1% compared to someone in the poorest 1%,” the researchers noted. Evasion was considered by subjects least acceptable. Avoidance measures were considered more acceptable, generally, with challenging of property taxes, studied closely in this work, getting a 2.3 on a scale of 0 (completely unacceptable) to 3 (completely acceptable).

The researchers’ sample of about 4,000 homeowners with homes valued below those of the richest 1% appeared to dislike tax avoidance when practiced by the wealthy. But learning that owners of the most expensive properties locally filed assessment protests (known as challenges in some locales) far more often than all other homeowners did not spur the masses to try it themselves, the study results suggest.  

Information about the potential tax savings from protesting, however, seemed to spark action. Protest rates rose when subjects learned the real average savings from protesting was more than they expected. 

Challenging One’s Property Tax Bill Is Easy

Dallas County follows a common procedure to challenge a property tax assessment, in which homeowners and businesses argue their property values have been set too high. Protesters fill out a form and submit evidence, such as recent sales prices of comparable properties nearby. This typically opens a negotiation process that, if successful, ends with a lower tax bill.

Several weeks before the 2022 deadline for property tax appeals in Dallas County, the researchers mailed local homeowners invitations to an online survey that also explained how to file a protest. (It’s easy, regardless of home value.) Some 4,174 homeowners that had not protested 2022 assessments so far took the survey. Mean home value within the sample, which excludes households in homes in the top or bottom 1% of value, was $448,000. 

The authors note that all of the subject groups, including those that got no new information on rates of protest or savings, filed protests at far higher rates than the general population. Although about 9% of the entire group had filed a protest the previous year, about 44% filed one after the study. Historically, protest rates in Dallas County outside of very expensive homes are about 8% to 12%, depending on value.       

The authors attribute this anomaly to factors in the study setup. The mailed invitation to the study said it related to tax appeals and included a link to a website for more information. Homeowners already interested in appealing probably were more likely to open the letter, visit the study website and complete the survey. Every participant who went through the survey, including those in the control group, saw explicit directions on how to file one.

Half of Wealthiest Homeowners Protest

The subjects were asked how likely they were to file an appeal in 2022, the current year. They were asked to estimate the 2021 rate of protests among the Dallas County homeowners whose homes were worth $1.9 million or more (the 1%). They also estimated how often homeowners with property values similar to their own protested and how much they thought protesters saved on average.

Experiment groups were shown actual data on one or more of those questions. For example, 49% of the top 1% protested in 2021. About 8% of homeowners whose properties were valued between $200,000 and $249,999 did so, and on average that group saw $322 in tax savings. 

After the experiments, the researchers tracked public records to see which subjects later appealed their 2022 tax bill. 

None of the data shared with subjects on protest rates, either for the richest or for peers, appeared to encourage more protests. Subjects who learned the 1% protested more often than they estimated were not motivated to do it themselves, the findings suggest.

But subjects who learned appeals generally saved more than they expected — an average $300 — became about 9% more likely to actually file a protest, according to the findings. Protest rate gains were highest among subjects who learned protests yielded a lot more money than they had guessed. It was lowest among those who had guessed closer to the correct amount of savings.