Using a panel of German income tax accounting data from taxpayers with no business income (employees), we find a negative relationship between tax preparation expenses and tax liabilities. However, preparation expenses are shown to exceed estimated tax savings. Specifically, one additional Euro spent on preparation yields an estimated tax savings of 72 cents in an OLS regression and 24 cents in a fixed effects regression. In addition, we observe substantial heterogeneity in tax savings among income groups, but even if we account for long‐term tax savings, tax liability reductions exceed tax preparation expenses only for the highest income quintile. In all other income quintiles, average preparation expenses exceed the estimated tax and time savings. Based on these results, we also examine whether other specific benefits affect an individual's decision to purchase tax preparation services, and the results indicate the importance of the benefits of coping with complexity and reduced uncertainty. Overall, our findings illustrate that the current tax compliance process violates at least two of Adam Smith's principles of taxation, taxes are neither certain nor fair.

In three experiments, we examine how the widespread phenomenon of overwithholding affects retirement savings and how the additional option at tax time of saving retroactively for retirement affects total savings levels. Our results show that overwithholding significantly reduces retirement savings. We show that this outcome can be explained by individuals' anchoring on their take‐home pay when making savings decisions and by individuals' reduced motivation to save in the presence of overwithholding. Moreover, we find that the introduction of an additional retroactive savings option at tax time increases overall savings by providing information about the correct after‐tax income and by emphasizing the importance of a savings norm that nudges individuals to save. Furthermore, our findings demonstrate that immediate taxation (back‐loaded retirement plans) results in greater effective savings than deferred taxation (front‐loaded retirement plans), irrespective of whether there is overwithholding or the existence of an additional option to save. Policy‐makers may therefore consider both the introduction of an additional savings option at tax time and immediate taxation as policy tools to encourage retirement saving.

Using a survey of tax auditors, we investigate which factors determine tax auditors' choice of negotiation strategies during tax audits and analyze the effect of their chosen strategy on audit outcomes. The results show that, compared to a cooperative auditor negotiation strategy, a competitive auditor negotiation strategy is associated with significantly higher additional assessed taxes. However, the competitive strategy is associated with a lower probability that the negotiation partners will reach an agreement. These findings indicate an advantage of combining competitive and cooperative tactics (i.e., using a “mixed strategy”). We find that although this mixed strategy does not lead to significantly fewer additional taxes, it results in a higher agreement probability. Moreover, we show that the probability of using a mixed strategy increases with audit expertise and time pressure, whereas the use of a competitive (cooperative) strategy increases with the availability of higher authority (the quality of the taxpayer's financial accounting system) and a perceived competitive (cooperative or mixed) negotiation strategy of the tax advisor. In sum, our study provides new insights into how firms' tax burden is affected by negotiations between tax auditors and firms' tax advisors. The way these negotiations affect firms' tax burden is relevant for both tax policy and firms.