American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Taxpayer Confusion: Evidence from the Child Tax Credit
American Economic Review
vol. 106,
no. 3, March 2016
(pp. 807–35)
(Complimentary)
Abstract
We develop an empirical test for whether households understand or misperceive their marginal tax rate. 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 wage income upon discovering 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 the hypothesis that tax complexity can cause confusion and leads to unintended behavioral responses. (JEL D12, D14, H24, H31)Citation
Feldman, Naomi E., Peter Katuščák, and Laura Kawano. 2016. "Taxpayer Confusion: Evidence from the Child Tax Credit." American Economic Review, 106 (3): 807–35. DOI: 10.1257/aer.20131189Additional Materials
JEL Classification
- D12 Consumer Economics: Empirical Analysis
- D14 Household Saving; Personal Finance
- H24 Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes
- H31 Fiscal Policies and Behavior of Economic Agents: Household