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Tax Refund Uncertainty: Evidence and Welfare Implications

Author

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  • Sydnee Caldwell
  • Scott Nelson
  • Daniel Waldinger

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

  • Sydnee Caldwell & Scott Nelson & Daniel Waldinger, 2023. "Tax Refund Uncertainty: Evidence and Welfare Implications," American Economic Journal: Applied Economics, American Economic Association, vol. 15(2), pages 352-376, April.
    • Handle: RePEc:aea:aejapp:v:15:y:2023:i:2:p:352-76
    DOI: 10.1257/app.20210383
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    Cited by:

    1. J. Michael Collins & Amrita Kulka, 2023. "Saving by buying ahead: stockpiling in response to lump‐sum payments," Fiscal Studies, John Wiley & Sons, vol. 44(4), pages 451-484, December.

    More about this item

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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