Inertia and Overwithholding: Explaining the Prevalence of Income Tax Refunds – Online Appendix I Thank Emmanuel Saez, Ulrike Malmendier and David Card for Research Guidance. I Am Grateful for Additional Feedback From

BASELINE MODEL. — A simple approach to modeling withholding behavior is with a two-period model. In period one, the agent receives income, w1, and makes a tax prepayment, τ̂ . In addition, savings are determined, s. The remaining income is consumed. In period two, the agent receives income, w2 and interest on savings. In addition, actual taxes, τ 0, are paid. If the prepayment is higher than actual tax liability, a refund is received. If the prepayment is lower than actual tax liability, the differenced is paid, and an additional penalty, π is levied on the underpaid tax liability. Prepayments are restricted to being non-negative. The maximization problem can be summarized as follows: