Abstract
This article uses data from survey questions fielded on the 2011 wave of the Cognitive Economics Study to uncover systematic errors in perceptions of income tax rates. First, when asked about the marginal tax rates (MTRs) for households in the top tax bracket, respondents underestimate the top MTR on wages and salary income, overestimate the MTR on dividend income, and therefore significantly underestimate the currently tax-advantaged status of dividend income. Second, when analyzing the relationship between respondents' self-reported average tax rates (ATRs) and MTRs, many people do not understand the progressive nature of the federal income tax system. Third, when comparing self-reported tax rates with those computed from self-reported income, respondents systematically overestimate their ATR while reported MTR are accurate at the mean, the responses are consistent with underestimation of tax schedule progressivity.
Highlights
This article uses data from survey questions fielded on the 2011 wave of the Cognitive Economics Study to uncover systematic errors in perceptions of income tax rates
Among the studies looking at awareness of income tax liability or marginal income tax rates (MTRs; e.g., see, Break 1957; Gensemer, Lean, and Neenan 1965; Brown 1968; Lewis 1978; Fujii and Hawley 1988) most were years ago, outside of the Unites States and without detailed enough data needed to characterize perceptions of both tax liability and marginal tax rates (MTRs)
Data come from a battery of questions from the 2011 wave of the Cognitive Economics Study (CogEcon), which was fielded between October 2011 and January 2012
Summary
This article uses data from survey questions fielded on the 2011 wave of the Cognitive Economics Study to uncover systematic errors in perceptions of income tax rates. Taxes and subsidies distort incentives, yet a substantial body of research finds only modest behavioral responses to tax changes. Among the studies looking at awareness of income tax liability (e.g., see, Enrick 1963, 1964; Wagstaff 1965; Auld 1979; Gemmell, Morrissey, and Pinar 2004) or marginal income tax rates (MTRs; e.g., see, Break 1957; Gensemer, Lean, and Neenan 1965; Brown 1968; Lewis 1978; Fujii and Hawley 1988) most were years ago, outside of the Unites States and without detailed enough data needed to characterize perceptions of both tax liability and MTR
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