Tax Refund Uncertainty: Evidence and Welfare Implications

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.

Saving by buying ahead: stockpiling in response to lump‐sum payments

“…We do not find similar increases in purchases among goods that are perishable. These 45 Hsieh, 2003;Caldwell, Nelson and Waldinger, 2023. results are consistent with past studies showing consumer stockpiling of goods. 46 However, our study exploits variation in household liquidity levels using a plausibly exogenous state tax policy, showing stockpiling also allows people to save goods, which they can afford to buy at lower per-unit prices, for future consumption.…”