Heuristic Perceptions of the Income Tax: Evidence and Implications for Debiasing

Alex Rees-Jones, Dmitry Taubinsky

NBER Working Paper No. 22884
Issued in December 2016, Revised in January 2017
NBER Program(s):Aging, Law and Economics, Labor Studies, Public Economics

Using an incentivized tax forecasting task, we estimate the prevalence of previously discussed heuristics for constructing mental representations of nonlinear incentive schemes. We find strong evidence for “ironing” (linearizing the tax schedule using one’s average tax rate), no evidence for “spotlighting” (linearizing the tax schedule using one’s marginal tax rate), and we identify features of the remaining misperceptions that are not captured by existing models. We then embed these misperceptions in a standard model of income taxation and study their welfare consequences. We find that our estimated misperceptions increase social welfare because they are helpful in achieving redistributive goals.

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Document Object Identifier (DOI): 10.3386/w22884

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