Taxpayer confusion: Evidence from the child tax credit

Naomi E. Feldman, Peter Katuscak, Laura Kawano

Research output: Contribution to journalArticlepeer-review

28 Scopus citations

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.

Original languageEnglish
Pages (from-to)807-835
Number of pages29
JournalAmerican Economic Review
Volume106
Issue number3
DOIs
StatePublished - 1 Mar 2016
Externally publishedYes

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