Mental Accounting Effects of Income Tax Shifting
45 Pages Posted: 6 Jun 2008 Last revised: 24 Mar 2012
Date Written: April 28, 2011
This paper makes use of an interesting natural experiment from a 1992 decrease in U.S. federal income tax withholding that shifted the timing of income tax payments for many households while leaving ultimate tax burdens unchanged. As a result, income that would typically be received as one large lump sum refund upon filing a tax return was shifted into the previous year's income in smaller monthly increments. The paper considers the impact of this withholding change in the context of mental accounting and finds that this policy change decreased the probability that a household saved for retirement by contributing to a tax-preferred retirement account. Additional robustness tests provide evidence that short-term saving did not simultaneously increase with the decrease in long-term retirement saving and that the main findings are not driven by liquidity constraints.
Keywords: Mental Accounting, Life-Cycle Hypothesis, Retirement Saving
JEL Classification: H31, E21, E62
Suggested Citation: Suggested Citation