Tax Perceptions and Preferences Over Tax Structure in the United Kingdom

Abstract

Do voters know their tax liabilities accurately or do they systematically misperceive them? Could such misperceptions influence voters' choices over alternative tax structures proposed by politicians? This paper assesses the accuracy of individuals' tax perceptions in the UK using micro-data from the British Social Attitudes Survey (1995) and tests an empirical model of the determinants of tax structure preferences, including tax misperceptions. A systematic bias towards over-estimation of income and expenditure tax (VAT) liabilities is found and individ uals' tax preferences appear to be both dominated by self-interest and distorted by tax misperceptions. Whether using a traditional utility maximisation framework or a variety of public choice frameworks, economists agree that consumer-voters, or taxpayer-voters, dislike taxes. Taxes lower the consumption possibility set and thereby utility. Politicians proposing higher taxes expect to lose votes unless they can persuade voters that the utility gain from the use of those taxes will exceed the tax-induced utility loss. Of course, the extent of individuals' losses will depend on their circumstances and how revenues are raised - the tax structure. Traditional tax incidence and excess burden analyses, and models of political costs associated with the tax structure (Hettich and Winer, 1984, 1988), each provide guidance on the extent to which different individuals may be expected to suffer (and vote) differently under alternative tax structures. Much will depend on attitudes towards, and perceptions of, specific taxes, especially personal income taxes and consumption taxes. Underlying most such analyses are two common presumptions: (i) tax preferences are dictated by self-interest; and (ii) individuals accurately assess their tax liabilities and so make informed choices. Two largely independent areas of literature have challenged these assumptions. First, models incorporating altruism