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Alex Rees-Jones: Friday April 1, 2016- 1199 NNH @ 2:30pm

Alex Rees-Jones (Wharton)

Friday, April 1st

2:30-3:45pm

1199 Nancy Nicholas Hall (WI Idea Room)



"Heuristic Perceptions of the Income Tax: Evidence and Implications"

 

Abstract:


A large literature studies the design of income taxes, typically relying on the assumption that people's responses to taxes are optimal. However, taxpayer behavior is governed by perceptions of taxes, rather than the taxes that are actually in place, and thus a precise understanding of taxpayer (mis)perceptions is crucial for policy design (cf. Farhi and Gabaix 2015). This paper reports a new survey experiment—sampling nearly 5000 American taxpayers—designed to provide a direct assessment of heuristic perceptions of the US federal income tax. In the survey experiment, participants are asked a series of questions about the tax that would be owed by a hypothetical taxpayer. This taxpayer is nearly identical to the participant in all ways, but household income is varied across questions. Using this data, we distinguish between, and separately quantify, systematic biases arising from an over-reliance on own average tax rate (“ironing”), own marginal tax rate (“spotlighting”), and generic over- or under-estimation of tax rates. We find that tax perceptions are well explained by a model with about three-quarters weight on the true tax, one-quarter weight on the forecast of an ironing heuristic, no spotlighting, and some residual overestimation of low taxes and underestimation of high taxes. Using our estimates, we study the implications for informational nudges and optimal tax design. We find that the existence of this bias can assist a social planner pursuing redistributive goals.

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