UC Berkeley

In a standard, life-cycle model of consumption and saving, the timing of income is not important for predicting consumption patterns, holding constant lifetime wealth. However, in the presence of either credit market imperfections or behavioral biases on the part of individual agents, the timing of income may indeed affect the consumption. The timing of income taxes and transfers may therefore have important effects on household welfare as well. In this manuscript, I present a collection of empirical papers that discuss the timing of US income taxes and transfers and the resulting effect on the ability to smooth consumption.

I first consider the phenomenon of overwithholding, which is prevalent in the US. I show in four different settings that inertia plays a significant role in explaining the observed bias toward overwithholding. Next, I focus on the Advance Earned Income Tax Credit (EITC), which allows an earlier payment of the EITC. I conduct a field experiment designed to test a number of theories that may explain the low take-up of this option and find that information is for the most part, not the main driving factor. As a by-product of the field experiment I generate significant gains in 401(k) participation.