The Salience of Complex Tax Changes: Evidence From the Child and Dependent Care Credit Expansion

Abstract

The literature on tax salience finds taxpayers are less responsive to the financial implications of a low-salience tax change than to an otherwise equivalent price change. This paper adds to this literature by showing that taxpayers are more responsive to the more salient features of a given complex tax change. Data from the Consumer Expenditure Survey are used to show that taxpayers responded to the direct implications of the 2003 expansion of the Child and Dependent Care Credit, but did not respond to the expansion's less salient interactions with other elements of the tax code.

The Effects of Child Care Subsidies on Paid Child Care Participation and Labor Market Outcomes: Evidence from the Child and Dependent Care Credit

“…Overall, I find dramatic increases in paid child care participation, which corroborates evidence from Miller and Mumford (2015), who find that child care expenditures increased in response to the federal CDCC expansion. Additionally, results are quite similar across single mothers and married households.…”

“…2 Rodgers (2018) estimates the tax incidence of the CDCC and finds that over half of every CDCC dollar is passed through in the form of higher child care prices and child care provider wages. Miller and Mumford (2015) use the federal CDCC expansion and data from the Consumer Expenditure Survey to estimate large elasticities of child care expenditures with respect to CDCC benefits. I augment their work by accounting for cross-state changes in CDCC generosity and allowing for fixed effects across states.…”

Measuring “Schmeduling”

“…For example, the challenges of optimizing with nonlinear incentive schemes are starkly apparent in insurance plan choice (Bhargava et al, 2017), cell-phone usage (Grubb and Osborne, 2015), and water and energy consumption (Carter and Milon, 2005;Ito, 2014). In the context of taxation, a growing literature documents behavior inconsistent with full optimization with respect to tax credits (Miller and Mumford, 2015;Feldman et al, 2016;Chetty and Saez, 2013;Chetty et al, 2013), and surveys of taxpayers document misunderstanding of features of the income tax schedule (reviewed in section 2.2). 1…”

“…Beyond such anecdotes, this difficulty has been documented in high-stakes managerial decisions about product pricing (see, e.g., Altomonte et al, 2015). Miller and Mumford, 2015;Rees-Jones and Taubinsky, 2018). But despite the frequent discussion of these heuristics in the behavioral public economics literature, little existing evidence informs their importance as an account of tax misperceptions.…”

Behavioral Public Economics

“…Miller and Mumford (2015) examine a salient and highly visible change to the Child and Dependent Care Credit (CDCC) introduced in 2003 that, when considered in isolation, increased the subsidization of child and dependent care administered through the income tax. This policy also interacted with provisions of the existing Child Tax Credit in a non-salient but osetting manner, in many cases creating an overall reduction in subsidization.…”