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

42 Pages Posted: 31 May 2017

See all articles by Naomi E. Feldman

Naomi E. Feldman

Hebrew University of Jerusalem, Department of Economics

Peter Katuscak

RWTH Aachen University - Chair for Economics (Microeconomics)

Laura Kawano

University of Michigan at Ann Arbor

Date Written: 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 household 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.

Suggested Citation

Feldman, Naomi E. and Katuscak, Peter and Kawano, Laura, Taxpayer Confusion Over Predictable Tax Liability Changes: Evidence from the Child Tax Credit (2013). FEDS Working Paper No. 2013-66. Available at SSRN: https://ssrn.com/abstract=2976867

Naomi E. Feldman (Contact Author)

Hebrew University of Jerusalem, Department of Economics ( email )

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

Peter Katuscak

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

Aachen, 52056
Germany

Laura Kawano

University of Michigan at Ann Arbor ( email )

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