Tax Refund Uncertainty: Evidence and Welfare Implications
- (pp. 352-76)
Abstract
Transfers paid through annual tax refunds are a large but uncertain source of income for poor households. We document that low-income tax filers have substantial subjective uncertainty about these refunds. We investigate the determinants and consequences of refund uncertainty by linking survey, tax, and credit bureau data. On average, filers' expectations track realized refunds. More uncertain filers have larger differences between expected and realized refunds. Filers borrow in anticipation of their refunds, but more uncertain filers borrow less, consistent with precautionary behavior. A simple consumption-savings model suggests that refund uncertainty reduces the welfare benefits of the EITC by about 10 percent.Citation
Caldwell, Sydnee, Scott Nelson, and Daniel Waldinger. 2023. "Tax Refund Uncertainty: Evidence and Welfare Implications." American Economic Journal: Applied Economics, 15 (2): 352-76. DOI: 10.1257/app.20210383Additional Materials
JEL Classification
- D81 Criteria for Decision-Making under Risk and Uncertainty
- D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
- D84 Expectations; Speculations
- G51 Household Finance: Household Saving, Borrowing, Debt, and Wealth
- H24 Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes
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