TaxProf Blog took note of my post a few weeks back on taxes and bankruptcy filings. I observed that there was little good empirical evidence on the effect of tax liabilities on bankruptcy, but that tax liaiblities are a factor in as much as 10% of bankruptcy filings, more than college expenses, death in the family, or gambling. The source for this was a Gallup Poll in 1997 (which I cited in my 1999 article with Edith Jones on means-testing in bankrutpcy), the results of which are reproduced in Vern McKinley’s Regulation article here.
Just to make clear, I didn’t say that taxes were the #1 cause of bankruptcy filings (as TaxProf summarized what I said), nor do I believe that is the case. What I said is that tax liabilities may be an understudied and underappreciated cause of bankruptcy filings. This would be especially the case if the effect of taxes on causing bankruptcy were defined as broadly as the effect of some other factors that cause bankruptcy have been defined. Moreover, if we take into account the effect of taxes on income and savings, as well as the fact that taxes are nondischargeable in bankruptcy and so are likely to be paid by strategic debtors who allow other dischargeable debts to go unpaid, then the relationship may be even greater.
Overall, my bottom line observation is that we really don’t have good data on the relationship between taxes, household finances, and bankruptcy filings, and that it is worth exploring in more detail.
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