Perception of income tax rates: evidence from Germany

Abstract

Tax research mostly uses actual tax rates (“objective tax rates”) to analyze and explain tax effects on taxpayers’ decisions and tax distribution. In this study, we asked subjects to estimate how high their tax burden is, and to give their opinion if, or to what extent, they would consider this perceived tax rate as fair. We provide evidence that the perceived income tax rates significantly deviate from the objective tax rates for the majority of taxpayers. The degree of misperception can be partly explained by the individual’s level of education, income, and whether the individual included social security contribution in their income tax rate estimation. Comparing the perceived tax rate with the tax rate that is regarded as fair, we find that the individual’s level of education and age influence their estimate. Taking the results of Schmoelders (Das Irrationale in der offentlichen Finanzwirtschaft. Rowohlt, Hamburg, 1960) into account, we show that the income tax misperception as well as the relation between perceived and fair income tax rates is surprisingly stable over time. The main distinction is that there is no more difference in tax perception between self-employed and employed people nowadays.