Abstract

http://ssrn.com/abstract=2296542
 
 

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Taxpayer Confusion Over Predictable Tax Liability Changes: Evidence from the Child Tax Credit


Naomi E. Feldman


Federal Reserve Board

Peter Katuscak


Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute)

Laura Kawano


US Department of Treasury - Office of Tax Analysis

September 9, 2013


Abstract:     
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, H31

working papers series


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Date posted: July 21, 2013 ; Last revised: September 11, 2013

Suggested Citation

Feldman, Naomi E. and Katuscak, Peter and Kawano, Laura, Taxpayer Confusion Over Predictable Tax Liability Changes: Evidence from the Child Tax Credit (September 9, 2013). Available at SSRN: http://ssrn.com/abstract=2296542 or http://dx.doi.org/10.2139/ssrn.2296542

Contact Information

Naomi E. Feldman (Contact Author)
Federal Reserve Board ( email )
Washington, DC 20551
United States
Peter Katuscak
Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute) ( email )
P.O. Box 882
7 Politickych veznu
Prague 1, 111 21
Czech Republic
HOME PAGE: http://www.cerge-ei.cz
Laura Kawano
US Department of Treasury - Office of Tax Analysis ( email )
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