Taxpayer Confusion: Evidence from the Child Tax Credit
Naomi E. Feldman
Federal Reserve Board
US Department of Treasury - Office of Tax Analysis
Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute)
August 1, 2014
We develop an empirical test for whether households understand or misperceive their tax liability changes. Our identifying variation comes from the loss of the Child Tax Credit when a child turns 17. Using this age discontinuity, we find that despite this tax liability increase being lump-sum and predictable, households reduce their reported labor income when they discover they have lost the credit. This finding suggests that households misinterpret at least part of this tax liability change as an increase in their marginal tax rate. This evidence supports that tax complexity can cause significant confusion and leads to unintended behavioral responses.
Number of Pages in PDF File: 32
Keywords: tax salience, tax complexity, labor income, permanent income hypothesis
JEL Classification: H21, H24, H31
Date posted: July 21, 2013 ; Last revised: October 1, 2014
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