Tax Refund Uncertainty: Evidence and Welfare Implications

55 Pages Posted: 25 Jan 2021 Last revised: 6 Feb 2021

See all articles by Sydnee Caldwell

Sydnee Caldwell

University of California, Berkeley - Haas School of Business; University of California, Berkeley - Department of Economics

Scott Nelson

University of Chicago - Booth School of Business

Daniel C. Waldinger

New York University (NYU) - Furman Center for Real Estate and Urban Policy

Date Written: January 5, 2021

Abstract

Transfers paid through annual tax refunds are a large but uncertain source of income for poor households. We document that low-income tax-filers have substantial subjective uncertainty about these refunds. We investigate the determinants and consequences of refund uncertainty by linking survey, tax, and credit bureau data. On average, filers’ expectations track realized refunds. More uncertain filers have larger differences between expected and realized refunds. Filers borrow in anticipation of their refunds, but more uncertain filers borrow less, consistent with precautionary behavior. A simple consumption-savings model suggests that refund uncertainty reduces the welfare benefits of the EITC by about 10 percent.

Suggested Citation

Caldwell, Sydnee and Nelson, Scott and Waldinger, Daniel C., Tax Refund Uncertainty: Evidence and Welfare Implications (January 5, 2021). Chicago Booth Research Paper No. 21-06, University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2021-18, Available at SSRN: https://ssrn.com/abstract=3771402 or http://dx.doi.org/10.2139/ssrn.3771402

Sydnee Caldwell

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

University of California, Berkeley - Department of Economics ( email )

579 Evans Hall
Berkeley, CA 94709
United States

Scott Nelson (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Daniel C. Waldinger

New York University (NYU) - Furman Center for Real Estate and Urban Policy ( email )

New York, NY 10012
United States

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