Viva simplicity! The role of tax advisory services in a simple tax system
Abstract
This paper examines the role of professional tax advisors in a personal income tax system characterized by relatively low complexity. Using population-wide administrative data from South Africa and a matched difference-in-differences design, we estimate the causal effect of using a tax advisor for the first time on individual tax outcomes. We find that using a tax advisor leads to a persistent reduction in reported tax liabilities of about 3.5%, consistent with reduced information and compliance frictions and the improved take-up of tax deductions and credits. The absolute tax savings due to the use of a tax advisor correlate positively with taxpayer income, while relative tax savings are homogeneous across the income distribution. Higher-quality tax advisors generate disproportionately large tax savings, but the aggregate impact of tax advisor services on tax progressivity and after-tax inequality remains modest.
Keywords
tax complexity, tax advisory services, personal income taxation, administrative tax data, South Africa