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Taxpayer Confusion: Evidence from the Child Tax Credit

51 Pages Posted: 21 Jul 2013 Last revised: 8 Aug 2015

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

University of Michigan

Multiple version iconThere are 2 versions of this paper

Date Written: July 2015

Abstract

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.

Keywords: tax salience, tax complexity, labor income, permanent income hypothesis

JEL Classification: H21, H24, H31

Suggested Citation

Feldman, Naomi E. and Katuscak, Peter and Kawano, Laura, Taxpayer Confusion: Evidence from the Child Tax Credit (July 2015). Available at SSRN: https://ssrn.com/abstract=2296542 or http://dx.doi.org/10.2139/ssrn.2296542

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

University of Michigan ( email )

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