Taxpayer Confusion Over Predictable Tax Liability Changes: Evidence from the Child Tax Credit
Naomi E. Feldman
Federal Reserve Board
Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute)
US Department of Treasury - Office of Tax Analysis
September 9, 2013
We develop a model of how taxpayers update beliefs over their tax rates when they encounter a non-salient tax liability change. We test the model's hypotheses using the loss of the Child Tax Credit when a child turns 17. Because this tax liability change is lump-sum and predictable, there should be no reaction in labor income if taxpayers are fully informed. Using this age discontinuity, we find, however, that losing the credit reduces parental labor income. This finding suggests that taxpayers misperceive the source of tax liability changes, leading to under- or over-reactions to changes in marginal tax rates.
Number of Pages in PDF File: 41
Keywords: tax salience, tax complexity, labor income, permanent income hypothesis
JEL Classification: H21, H24, H31working papers series
Date posted: July 21, 2013 ; Last revised: April 20, 2014
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