Inertia and Overwithholding: Explaining the Prevalence of Income Tax Refunds
AbstractOver three-quarters of US taxpayers receive income tax refunds, which are effectively zero-interest loans to the government. Previous explanations include precautionary and/or forced savings motives. I present evidence on a third explanation: inertia. I find that following a change in tax liability, prepayments are only adjusted by 29 percent of the tax change after one year and 61 percent after three years. Adjustment increases with income and experience, and for EITC recipients, I rule out adjustment greater than 2 percent. Thus, policies affecting default-withholding rules are no longer neutral decisions, but rather, may affect consumption smoothing, particularly for low-income taxpayers. (JEL D14, H24, K34)
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Bibliographic InfoArticle provided by American Economic Association in its journal American Economic Journal: Economic Policy.
Volume (Year): 4 (2012)
Issue (Month): 1 (February)
Find related papers by JEL classification:
- D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
- H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
- K34 - Law and Economics - - Other Substantive Areas of Law - - - Tax Law
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