IDEAS home Printed from
MyIDEAS: Login to save this article or follow this journal

Inertia and Overwithholding: Explaining the Prevalence of Income Tax Refunds

  • Damon Jones
Registered author(s):

    Over 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)

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL:
    Download Restriction: no

    File URL:
    Download Restriction: no

    File URL:
    Download Restriction: Access to full text is restricted to AEA members and institutional subscribers.

    Article provided by American Economic Association in its journal American Economic Journal: Economic Policy.

    Volume (Year): 4 (2012)
    Issue (Month): 1 (February)
    Pages: 158-85

    in new window

    Handle: RePEc:aea:aejpol:v:4:y:2012:i:1:p:158-85
    Note: DOI: 10.1257/pol.4.1.158
    Contact details of provider: Web page:

    More information through EDIRC

    Order Information: Web:

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Daniel Feenberg & Elisabeth Coutts, 1993. "An introduction to the TAXSIM model," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 12(1), pages 189-194.
    2. Naomi E. Feldman, 2010. "Mental Accounting Effects of Income Tax Shifting," The Review of Economics and Statistics, MIT Press, vol. 92(1), pages 70-86, February.
    3. Claudia R. Sahm & Matthew D. Shapiro & Joel Slemrod, 2012. "Check in the Mail or More in the Paycheck: Does the Effectiveness of Fiscal Stimulus Depend on How It Is Delivered?," American Economic Journal: Economic Policy, American Economic Association, vol. 4(3), pages 216-50, August.
    4. Stefano DellaVigna & Ulrike Malmendier, 2006. "Paying Not to Go to the Gym," American Economic Review, American Economic Association, vol. 96(3), pages 694-719, June.
    5. Stefano DellaVigna, 2009. "Psychology and Economics: Evidence from the Field," Journal of Economic Literature, American Economic Association, vol. 47(2), pages 315-72, June.
    6. Raj Chetty & Adam Looney & Kory Kroft, 2009. "Salience and taxation: theory and evidence," Finance and Economics Discussion Series 2009-11, Board of Governors of the Federal Reserve System (U.S.).
    7. Abadie, Alberto & Gay, Sebastien, 2004. "The Impact of Presumed Consent Legislation on Cadaveric Organ Donation: A Cross Country Study," Working Paper Series rwp04-024, Harvard University, John F. Kennedy School of Government.
    8. Neumark, David, 1995. "Are Rising Earnings Profiles a Forced-Saving Mechanism?," Economic Journal, Royal Economic Society, vol. 105(428), pages 95-106, January.
    9. Jannett Highfill & Douglas Thorson & William V. Weber, 1998. "Tax Overwithholding as a Response To Uncertainty," Public Finance Review, , vol. 26(4), pages 376-391, July.
    Full references (including those not matched with items on IDEAS)

    This item is featured on the following reading lists or Wikipedia pages:

    1. Inertia and Overwithholding: Explaining the Prevalence of Income Tax Refunds (AEJ:EP 2012) in ReplicationWiki

    When requesting a correction, please mention this item's handle: RePEc:aea:aejpol:v:4:y:2012:i:1:p:158-85. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jane Voros)

    or (Michael P. Albert)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.