Taxpayer Confusion: Evidence from the Child Tax Credit

Naomi Feldman, Peter Katuš?ák and Laura Kawano

American Economic Review, 2016, vol. 106, issue 3, 807-35

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)

JEL-codes: D12 D14 H24 H31 (search for similar items in EconPapers)
Date: 2016
Note: DOI: 10.1257/aer.20131189
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Citations: View citations in EconPapers (70)

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