Taxpayer Confusion: Evidence from the Child Tax Credit

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

JEL Classification: H21, H24, H31

Suggested Citation: Suggested Citation

Feldman, Naomi E. and Kawano, Laura and Katuscak, Peter, Taxpayer Confusion: Evidence from the Child Tax Credit (August 1, 2014). FEDS Working Paper 2013-66, Available at SSRN: https://ssrn.com/abstract=2350866 or http://dx.doi.org/10.2139/ssrn.2350866