Mental accounting effects of income tax shifting

This paper analyzes a 1992 decrease in U.S. federal income tax withholding that shifted the timing of income tax payments while leaving ultimate tax burdens unchanged. Consequently income typically received as a lump-sum refund on ling a tax return was shifted into the previous year's monthly income. This paper considers the impact of the withhold-ing change in the context of mental accounting and nds a decrease in the probability that households contributed to a tax-preferred retirement account. Additional robustness tests show that short-term saving did not simultaneously increase and that the main ndings are not driven by liquidity constraints.