Taxpayer Confusion: Evidence from the Child Tax Credit

32 Pages Posted: 6 Nov 2013 Last revised: 1 Oct 2014

See all articles by Naomi E. Feldman

Naomi E. Feldman

Hebrew University of Jerusalem, Department of Economics

Laura Kawano

University of Michigan at Ann Arbor

Peter Katuscak

RWTH Aachen University - Chair for Economics (Microeconomics)

Multiple version iconThere are 2 versions of this paper

Date Written: August 1, 2014

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

JEL Classification: H21, H24, H31

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

Naomi E. Feldman (Contact Author)

Hebrew University of Jerusalem, Department of Economics ( email )

Mount Scopus
Jerusalem, IL Jerusalem 91905
Israel
9190501 (Fax)

Laura Kawano

University of Michigan at Ann Arbor ( email )

Peter Katuscak

RWTH Aachen University - Chair for Economics (Microeconomics) ( email )

Aachen, 52056
Germany

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