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Mental Accounting Effects of Income Tax Shifting

Naomi E. Feldman^1,2

¹ Ben-Gurion University of the Negev · ² Hebrew University of Jerusalem

This paper analyzes a 1992 decrease in U.S. federal income tax withholding that shifted the timing of income tax payments while leaving ultimate tax burdens unchanged. Consequently income typically received as a lump-sum refund on filing a tax return was shifted into the previous year's monthly income. This paper considers the impact of the withholding change in the context of mental accounting and finds a decrease in the probability that households contributed to a tax-preferred retirement account. Additional robustness tests show that short-term saving did not simultaneously increase and that the main findings are not driven by liquidity constraints.

DOI

10.1162/rest.2009.11892

Volume

92 (1)

Pages

70-86

Language

en

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BibTeX

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