Abstract

VITA (Volunteer Income Tax Assistance) is a federal program that enables low-income, veteran, low English speaking, or disabled taxpayers to have their yearly tax filing completed free of charge by volunteer income tax preparers. Taxpayers who utilize the program avoid commercial tax preparation fees while still receiving any tax refunds for which they are eligible. Eligibility requirements for the program suggest participants are likely to have a high marginal propensity to consume, defined as the share of additional income spent on consumption. As a result, transfer payments given to program participants may generate a multiplier effect, where increased spending stimulates and recirculates through the local economy. To build the consumption multiplier model, this study utilizes data from an IRS VITA site in Asheville, NC, for a sample of 573 individuals covering tax refunds, tax credit claims, the claimed number of dependents, and taxpayer adjusted gross income. This study then draws from existing economic literature to assign marginal propensity to consumer metrics that correspond to the adjusted gross income of the individuals who received refunds. Conjoining the two data sets together creates a quantified multiplier effect of the tax refunds provided by a free, volunteer-based tax program. Additionally, this paper incorporates a regression analysis of the VITA site data to better illustrate the relationship between income, refundable tax credits, and dependents. The findings of the multiplier model suggest the economic impact on Buncombe County is 2.71 times larger than the initial sum of refunds due to the recirculation of money through marginal spending. This study additionally completes robustness checks by utilizing varying MPC to establish a range of multiplier estimates from 1.58 to 5.86 times the initial refund amounts. This finding suggests that policy aimed at increasing VITA participation by eligible taxpayers may be a cost-effective mechanism to stimulate a local economy and serve the community.  

Keywords

Volunteer Income Tax Assistance (VITA), Tax Refunds, Marginal Propensity to Consume (MPC), Fiscal Multiplier

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