Do People Confuse Average and Marginal Tax Rates? Evidence from a Field Experiment

Abstract

The purpose of this experiment is to see if people react to labor market schedules in a manner that suggests confusion between average and marginal tax rates. I present individuals with identical payment schedules for data entry of a series of paragraphs, making it arguably harder for individuals to be confused by average or marginal payment schemes. If people “iron”, then individuals presented with payment schedules displaying average payment rates should do more work than individuals presented with payment schedules displaying marginal payment rates. My first experiment demonstrates this. A natural follow-up question is whether individuals still “iron” when they are not presented with either average or marginal payment schedules. This may more accurately reflect an actual real-world setting where schedules are often hidden and difficult to compute. My second experiment finds that when workers are not primed with per paragraph payments, they enter significantly more paragraphs than when they are shown either average or marginal payment schedules.