The Propensity to Itemize in the Context of a Human Capital Model

The decision whether or not to utilize the “long-form†and itemize deductions depends on income and non-income factors. The distribution of these factors among the various States tends to be stable over long periods of time. It follows that the federal individual income tax (FIIT) may be associated with a systematic deviation from location—neutrality. This is argued to be especially germane in periods associated with major reforms in the tax codes. It is suggested that this phenomenon is explicable in terms of a human capital model. The decision in any given year to itemize is a function of past accumulation of specific and specialized human capital. The effect of a tax reform is a large scale destruction of such capital. Therefore, certain predictions concerning the time path of the “propensity to itemize deductions†(PID) follow. Empirical support for this model is found from cross-section data at the State level, from years both preceding and following the 1986 Tax Reform and Simplification Act (TRA).