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American Economic Review Vol. 106 No. 3 2016

Taxpayer Confusion: Evidence from the Child Tax Credit

Naomi E. Feldman1; Peter Katuš čÁk2; Laura Kawano3

1 Research Division, Board of Governors of the Federal Reserve System, Washington, DC 20551 (e-mail: ) · 2 Faculty of Economics, University of Economics in Prague, náměstí Winstona Churchilla 4, 130 67 Prague 3, Czech Republic and Center for Economic Research and Graduate Education-Economics Institute (CERGE-EI), Politických vězňů 7, 110 00 Prague, Czech Republic (e-mail: ) · 3 Office of Tax Analysis, US Department of Treasury, Washington, DC 20551 (e-mail: )

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.

DOI
10.1257/aer.20131189
Volume
106
Issue
3
Pages
807-835
Language
en
Sources
openalex crossref bibtex:phds-export.bib

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