Taxpayer Confusion over Predictable Tax Liability Changes: Evidence from the Child Tax Credit

By Federal Reserve Board

This paper offers two contributions to the literature on taxpayer perceptions of the taxsystem. Our first contribution is that we develop a model that generates predictions overhow taxpayers update their beliefs about their marginal tax rates when they experiencean unexpected change in their tax liability. Our model is an extension of a standard full information, rational agent model that allows for imperfect knowledge of the income taxschedule. In the model, a household is subject to a linear tax schedule that changes fromyear to year. The household perceives innovations to the tax schedule with noise dueto information gathering and processing costs. When the household is uncertain aboutthe exact tax schedule it faces, it updates its beliefs using signals about the tax schedulegenerated by interactions with the tax system.

• Format: Paperback
• Language: English
• ISBN: 1499136765
• ISBN13: 9781499136760
• Release Date: April 2014
• Publisher: Createspace Independent Publishing Platform
• Length: 42 Pages
• Weight: 0.27 lbs.
• Dimensions: 0.1" x 8.5" x 11.0"