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Taxpayer confusion over predictable tax liability changes: evidence from the Child Tax Credit

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  • Naomi E. Feldman
  • Peter Katuscak
  • Laura Kawano

Abstract

We develop a model of how taxpayers update beliefs over their tax rates when they encounter a non-salient tax liability change. We test the model's hypotheses using the loss of the Child Tax Credit when a child turns 17. Because this tax liability change is lump-sum and predictable, there should be no reaction in labor income if taxpayers are fully informed. Using this age discontinuity, we find, however, that losing the credit reduces household labor income. This finding suggests that taxpayers misperceive the source of tax liability changes, leading to under- or over-reactions to changes in marginal tax rates.

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File URL: http://www.federalreserve.gov/pubs/feds/2013/201366/201366abs.html
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File URL: http://www.federalreserve.gov/pubs/feds/2013/201366/201366pap.pdf
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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2013-66.

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Date of creation: 2013
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Handle: RePEc:fip:fedgfe:2013-66

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  1. James J. Heckman & Sergio Urzua & Edward Vytlacil, 2009. "Understanding Instrumental Variables in Models with Essential Heterogeneity," Working Papers 200941, Geary Institute, University College Dublin.
  2. Kuhn, Peter J. & Skuterud, Mikal, 2002. "Internet Job Search and Unemployment Durations," IZA Discussion Papers 613, Institute for the Study of Labor (IZA).
  3. Betsey Stevenson, 2008. "The Internet and Job Search," NBER Working Papers 13886, National Bureau of Economic Research, Inc.
  4. Kuhn, Peter J. & Mansour, Hani, 2011. "Is Internet Job Search Still Ineffective?," IZA Discussion Papers 5955, Institute for the Study of Labor (IZA).
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