Demand for Services: Determinants of Tax Preparation Fees

We empirically investigate the demand for income tax preparation services by examining factors that affect both the choice and level of utilization of service. We identify the demand factors as the taxpayer's (1) opportunity costs, (2) estimated tax savings when using a preparer, and (3) historical uncertainty in tax liability. Our panel data set allows us to measure individual-specific uncertainty, a new measure in assessing determinants of tax service demand. Consistent with prior research, choice is measured by whether a taxpayer uses a professional paid preparer. The preparer's fee is the measure of utilization level. Fee information is heavily censored in part because fees only need to be disclosed when taxpayers itemize deductions and have miscellaneous itemized deductions above the 2 percent limit. We develop a partially censored regression model to accommodate the censoring. Similar to Cragg (1971), we decouple the choice and level of utilization models; findings indicate differences between these models. Generally, taxpayers choose paid preparers for time savings and uncertainty protection. Fees, however, reflect the purchase of time and tax savings, not uncertainty protection. These results suggest that pricing structures for professional tax preparation services could be adjusted to more closely reflect the services provided.