Perceptions and Realities of Average Tax Rates in the Federal Income Tax:
Evidence from Michigan
Charles L. Ballard and Sanjay Gupta
August 24, 2016
Key Words: Income Tax, Belief
JEL Codes: D83, H24, H31
Ballard: Department of Economics, Michigan State University, Marshall-Adams Hall, 486 W.
Circle Drive, East Lansing, MI 48824. 517-353-2961. [email protected]. Gupta: Eli Broad
College of Business, Michigan State University, 630 Bogue Street, East Lansing, MI 48824. 517355-8379. [email protected].
We are grateful to Lauren Bretz, Harris Bunker, Kimberly Gannon, Armando Hernandez, and
Matthew Suandi for excellent research assistance. Any errors are our responsibility.
Perceptions and Realities of Average Tax Rates in the Federal Income Tax:
Evidence from Michigan
Abstract
We asked a random sample of the Michigan population to identify their average tax rate in the
federal individual income tax. We find that 86 percent of respondents overstate their actual
average tax rate, often by very large amounts. All demographic subgroups overstate their
average income-tax rates substantially. Those who believe taxes on households like theirs
should be lower overstate their average income-tax rate significantly more, all else equal. Those
who believe that tax dollars are spent ineffectively also overstate their average tax rate to a
greater extent than those who believe tax dollars are spent effectively, all else equal.
Perceptions and Realities of Average Tax Rates in the Federal Income Tax:
Evidence from Michigan
I.
Introduction
How much do people think they pay in income taxes? If taxpayers are misinformed (either by
overstating their tax liabilities or by understating them), many standard analyses of the economic
effects of taxes can be called into question.
Over the decades, a small number of researchers have used survey methods to learn about
taxpayers’ beliefs regarding their marginal and average tax rates, and to compare those beliefs
with the actual rates. Most studies have found widespread errors, although some researchers find
a tendency toward overstatement of tax rates, while others find a tendency toward
understatement. Also, there is considerable variation in the estimated magnitude of the errors.
A few researchers have studied taxpayer beliefs regarding marginal tax rates. Gensemer,
Lean, and Neenan (1965) used data from a sample of high-income U.S. taxpayers for 1963.
They found that significant numbers understated their marginal tax rates, while others overstated
their rates, and others were unaware. Using data from Scottish workers and managers, Brown
(1969) found that large majorities overstated their marginal tax rates. Lewis (1978) surveyed
residents of Bath, Somerset, and found a tendency to understate marginal tax rates; the perceived
rates were about 10 percentage points below the actual rates. Using U.S. data from the 1983
Survey of Consumer Finances, Fujii and Hawley (1988) found that taxpayers modestly
understate their marginal tax rates. Wahlund (1989) found that, on average, a sample of Swedish
men understated their marginal tax rates in 1982, but overstated the rates in three subsequent
surveys in 1983 and 1984. In a survey of 108 American taxpayers, Rupert and Fischer (1995)
found that those who overstate their marginal tax rate outnumber those who understate it by two
1
to one, and that the mean overstatement was 3.61 percentage points. Using data from the 1995
British Social Attitudes Survey, Gemmell, Morrissey, and Pinar (2004) found “a systematic bias
toward over-estimation” of marginal tax rates (emphasis in the original), although their measure
of the degree of misperception is very crude.
Another handful of researchers have studied taxpayer beliefs regarding average tax rates.
In a pair of studies, Enrick (1963, 1964) found that substantial majorities of Americans
understated their average tax rates. Using a survey of workers at 11 U.S. firms, Wagstaff (1965)
found that 42.9 percent of respondents understated their taxes, while 44.5 percent overstated
them. The mean of the responses was an overstatement of 4.6 percent. Auld (1979) used a 1975
survey in which Ontario residents were asked how many dollars they paid in income tax. He
found substantial overstatement of taxes by low-income respondents, along with understatement
by those in the middle and upper income ranges. Using Swedish data from 2003, Kapteyn and
Ypma (2007) found a tendency toward overstatement of average tax rates.
Gideon (2015) uses data from the 2011 wave of the Cognitive Economics Study to assess
beliefs about both average and marginal income-tax rates. On average, his survey respondents
systematically overstate their average tax rates, although their estimates of marginal rates are
accurate at the mean. However, Gideon’s results are based on a sample that is much older than
the U.S. population. Gideon’s sample is also much better educated than the population as a
whole, has much higher income, and has far fewer non-whites.
It is difficult to draw definitive conclusions from this literature, with studies from
different countries and different time periods, using a variety of samples and techniques. The
difficulty is exacerbated by the fact that many of the studies are based on samples that are small
2
and/or unrepresentative. If there is a consensus, it is that errors are rampant, but the studies
differ both in the direction and magnitude of the errors they find.
In this paper, we investigate perceptions of the respondent’s average tax rate1 in the U.S.
federal individual income tax, using data from a sample that is representative of the Michigan
adult population. Although some of our respondents understate their average income-tax rate, an
overwhelming majority (about 86 percent) overstate it. In our preferred specification, the
median respondent overstates her average income-tax rate by more than 12 percentage points,
and the mean overstatement is nearly 15 percentage points. On average, these errors are larger
than previous researchers have found.
Many of the papers in this literature report only the mean overstatement or mean
understatement of tax rates. However, one of our most interesting findings is the remarkably
wide spread of the errors, ranging from an understatement of 19 percentage points to an
overstatement of 100 percentage points. We will explore this in detail below.
In an effort to explain the misstatements of average income-tax rates, we estimate
regression models that include variables to capture survey respondents’ perceptions of the tax
system, attitudes toward specific federal spending programs, taxpayer characteristics, and taxcompliance behavior. We also include several demographic variables. We find that those who
believe taxes on households similar to theirs should be lower overstate their average income-tax
rate significantly more, all else equal. We also find that those who believe that tax dollars are
1
We concentrate on average tax rates because we believe that ordinary citizens are more likely
to have a grasp of average rates than marginal rates. Also, de Bartolome (1995) found that many
individuals use the average tax rate “as if” it were the marginal rate. Nevertheless, we look
forward to studying perceptions of marginal tax rates in future work.
3
spent ineffectively overstate their average tax rate to a greater extent than those who believe tax
dollars are spent effectively, all else equal.
II.
Data
Our dataset is created from a survey of 978 Michigan adults, ranging in age from 18 to 92. The
survey was conducted in August, September, and October, 2013, by Michigan State University’s
State of the State Survey (SOSS). This survey, which was established in 1994, has provided the
data for many published papers, including Davis and Silver (2003), Kaplowitz, Broman, and
Fisher (2006), and Skidmore, Ballard, and Hodge (2010). The respondents to this survey
constitute a random sample of the Michigan adult population.2 We believe that evidence from
Michigan (the tenth most populous state in the United States) is of interest in its own right.
Moreover, the characteristics of the Michigan population are sufficiently similar to national
averages for us to suggest that it may be possible to generalize our results to the broader
American population. In Table 1, we show some demographic characteristics of the sample, of
the Michigan population from which it is drawn, and of the population of the entire United
States.3
<Table 1 here>
2
The survey is conducted by telephone, with approximately equal numbers of landlines and cell
phones. The importance of cell phones was illustrated dramatically in March, 2016, when a
number of landline-only surveys predicted that Hillary Clinton would win the Michigan
Democratic presidential primary by a double-digit margin. The State of the State Survey was the
only one to indicate that the race was a statistical tie; those results were validated when Bernie
Sanders won a narrow victory over Clinton.
3
We use survey weights to generate the data shown in Table 1, as well as all other data from the
State of the State Survey described in this paper. Additional details about the Survey can be
found at http://www.ippsr.msu.edu/survey-research/state-state-survey-soss.
4
III.
Perceptions of Average Tax Rates
Every round of the State of the State Survey has a complete set of demographic questions, as
well as questions on consumer confidence and approval of the President and Governor. The rest
of the Survey includes questions sponsored by researchers, which vary from one round of the
Survey to the next. In this round, we asked 15 questions, which we will detail below. For the
purposes of this paper, the key question is “What percentage of your household’s income would
you say is paid in federal income tax?”4 Two hundred thirty respondents said they did not know,
or refused to answer, which leaves 748 usable responses. We did not explicitly request that
respondents provide a non-negative integer answer, but all did.
Figure 1 shows the distribution of perceived average income-tax rates, for bins covering
10 percentage points.5 The responses are remarkably dispersed. Some 8.1 percent of the
respondents said their household paid no income tax. The median response was that the
household paid 20 percent of its income in federal income tax. (An average tax rate of 20
percent was also the modal response, provided by 18.1 percent of respondents.) The mean
response was about 23.6 percent. (These results contrast with those of Gideon (2015), whose
sample had a median reported average tax rate of 15 percent, and a mean of 15.4 percent.)
<Figure 1 here>
4
It is possible that the respondents did not truly understand the question. For example, it is
possible that some respondents thought we were referring to all federal taxes, or to all taxes
(including state and local taxes), or to the marginal tax rate in the income tax. If some
respondents thought we were referring to any of these things, it could provide a partial
explanation for the strong tendency toward overstatement of average tax rates. However,
although we cannot guarantee that respondents truly understood the question, we do believe that
the question is worded clearly.
5
More than 75 percent of the respondents reported an integer that is divisible by five, and more
than 49 percent reported an integer divisible by ten.
5
At the other end of the spectrum, 2.3 percent of the respondents said they believe their
household paid 100 percent of its income in federal income tax. In addition to the respondents
who gave 100 percent as their answer, another eight percent of respondents reported an average
tax rate of 40 percent or more. Any average rate in that range cannot possibly be correct, since
the top marginal tax rate was 35 percent in 2012, and 39.6 percent in 2013.
Extreme survey responses such as these are not rare; dealing with them is an ongoing
challenge for survey researchers.6 In much of the statistical analysis reported below, we will use
a sample that excludes some of the larger responses. We will discuss the sensitivity of the results
with respect to the extent to which outliers are excluded.
IV.
Calculations of Actual Average Income-Tax Rates
The demographic questions in the survey give us enough information to estimate the true average
income-tax rate faced by each respondent. Household income is collected in the 11 income
ranges shown in Table 1. For the lowest ten of those income ranges, we assume that the
household’s income is at the midpoint of the range. We have tried a variety of assumptions for
the open-ended top income category, for households with income in excess of $150,000; the
6
In another round of State of the State Survey, conducted in 2014, respondents were asked to
state the percentage of the Michigan population that is African American. The correct answer is
about 14 percent; the median response was 30 percent, and about one percent of respondents said
that Michigan’s population is entirely African American. (This huge overstatement of minority
populations is consistent with a literature that has been carried out largely in sociology. For
example, see Nadeau, Niemi, and Levine (1993) and Alba, Rumbaut, and Marotz (2005).) The
same round of the State of the State Survey had similar questions about Muslims and gays and
lesbians, and once again most respondents overstated the size of the minority population by a
wide margin.
6
overall results are fairly insensitive with respect to this choice.7 We know the number of adults
and children in each household, so we can calculate the personal exemptions. We also know the
marital status of the respondent, so we can apply the appropriate tax-rate schedule.8 (We assume
that all married couples file a joint return.9)
Using the information on household income and the number of children, we also estimate
the Earned Income Tax Credit (EITC) for which the household is eligible.10 Note that lowincome households who receive the EITC may have a negative average tax rate. However, none
of our respondents reported a negative rate, which suggests that they may not consider the EITC
when deciding what they believe their average tax rate to be. Thus, although we calculate the
average tax rate with and without the EITC, we will focus primarily on the calculations that
ignore the EITC.
Finally, we use data from the Internal Revenue Service, Statistics of Income, to estimate
the dollar amount of itemized deductions which the household might claim. For households for
7
In the regressions reported below, we assume that the respondents in the open-ended category
have household income of $300,000.
8
We assume that the tax rates for earned income are applied to all taxable income. However,
dividends and long-term capital gains were taxed at lower rates than earned income at the time of
this survey. Thus for those in our sample who have dividend and long-term capital-gain income,
our estimate of the true tax liability will be biased upward.
9
In 2012 and 2013, more than 95 percent of the married returns were joint returns. However,
the rest of the married couples filed separate returns, which will typically lead to higher tax
liabilities. Thus for any married person in our sample who actually filed a separate return, our
estimate of the true tax liability will be biased downward.
10
A fraction of those who are eligible for the EITC do not claim it. (See Scholz (1994).) For
those who do not claim EITC payments for which they are eligible, our estimate of the true tax
liability will be biased upward. On the other hand, some households have managed to claim
EITC payments for which they are ineligible. (See McCubbin (2000).)
7
which this amount exceeds the amount of the standard deduction, we assume that the household
itemizes its deductions; otherwise, we apply the standard deduction.
This survey was conducted in the summer and fall of 2013. This leads to the question of
whether we should apply the tax rates for 2012 or 2013. Since the respondents had recently filed
their income-tax returns for the 2012 tax year when they took the survey, our preferred
calculation uses the tax-rate schedules, exemptions, and standard deductions for 2012. However,
we also perform the calculations with the 2013 tax-law parameters.11 This has only a very small
effect on the results.
V.
Comparisons of Perceived and Actual Average Tax Rates
In Figure 2, we show our estimates of the differences between the respondents’ perceived
average income-tax rates and our calculations of their actual tax rates. These are based on our
preferred specification, using 2012 tax law and excluding the EITC from the calculations. For
those who provided an estimate of the average tax rate, about 12.4 percent indicated that they
pay a lower rate than our calculations would suggest. Another 1.3 percent reported an average
income-tax rate that corresponds exactly to our calculations. (All of these were respondents who
said that their average tax rate is zero, and for whom we believe the average tax rate is indeed
zero.) That leaves more than 86 percent who we believe have overstated their average incometax rate. The median respondent overstated his household’s average income-tax rate by about
12.1 percentage points. The mean overstatement was about 14.9 percentage points.
11
Wahlund (1989) provides an interesting discussion of the ways in which taxpayers update their
assessments of their tax rates. He conducted four surveys of Swedish men, at six-month
intervals in 1982, 1983, and 1984, at a time when marginal tax rates for some Swedes were being
reduced substantially. Wahlund concludes that the tax cuts “were only partly perceived, not at
once, and not at the same time by everybody.”
8
<Figure 2 here>
As mentioned above, some of the respondents gave very large estimates of their
households’ average income-tax rates. However, even if we exclude some of the largest of these,
the overall picture of substantial overstatement of taxes does not change fundamentally. If we
exclude those who said their average tax rate is 100 percent, the mean overstatement drops from
14.9 percentage points to 13.1 percentage points. If we exclude those who reported an ATR of
70 percent or higher, the mean overstatement drops to 11.8 percent, and it drops to 10.7 percent
if we exclude those who reported an ATR of 40 percent or higher. We consider that any of these
values is evidence of a very substantial degree of overstatement.
We perform regression analyses in an attempt to explain the variation in the misstatement
of average income-tax rates; we will report on the regressions below. First, however, Table 2
shows the mean number of percentage points by which respondents overstate their federal
income taxes, for a variety of subgroups.
<Table 2 here>
Table 2 reveals that, on average, blacks and Hispanics overstate their income taxes more
than whites. Those without a Bachelor’s degree overstate their income taxes by more than those
with a Bachelor’s degree or higher, although the difference is not statistically significant.
Women overstate their income taxes slightly more than men do, but this difference does not
come close to statistical significance. Table 2 also shows the mean overstatement for those from
different age groups, different political-party affiliations, different marital statuses, and different
community types. The central message of Table 2 is that each of these groups overstates its
average income-tax rate substantially. No group within the population has an average degree of
overstatement that is close to zero.
9
VI.
Explanatory Variables
In addition to the question about the percentage of household income paid in federal income tax,
we asked 14 other questions about attitudes toward taxation, attitudes toward specific spending
programs, and tax-preparation behavior. Our goal was to develop variables that might explain
the variation in the misstatement of the average income-tax rate. However, we believe that the
responses to these other questions are of interest in their own right. Summary information on the
distribution of responses to these questions is shown in Tables 3-5, and additional details are
available on request.
In Table 3, for the question labeled “Tax Effectiveness”, 76 percent of the respondents
believe their tax dollars are spent ineffectively. The results for the next two questions in Table 3
suggest that, overall, the Michigan adult population would prefer the federal income tax to be
somewhat more progressive than it is now. About 46 percent of respondents say that taxes on
high-income households should be higher, while only about 22 percent say that high-income
households should have lower taxes. A slim majority of 51.5 percent say that low-income
households should pay lower income taxes, while only 11.6 percent say that the income taxes
paid by low-income households should be higher.12
<Table 3 here>
The results for Question #4 in Table 3 indicate that nearly half of the respondents say that
the federal income taxes paid by households like theirs are about right. Among those who
believe there should be a change in the income taxes for households like their own, those who
12
In a survey of heads of household in the United States, Hite and Roberts (1991) found an
overall preference for a mildly progressive rate structure. In a review of the studies by Hite and
Roberts and others, Sheffrin (1993) concluded that views about preferred rates depend on
context. Sheffrin (2013) emphasized the tremendous heterogeneity of views about the optimal
progressivity of the tax system.
10
would like to see lower taxes outnumber those who would like to see higher taxes by more than
nine to one. The results from the last question in Table 3 show that a majority of respondents are
unaware that the proportion of the economy that goes to taxes is lower in the United States than
in any other rich country.
In Table 4, we show the responses to some additional questions about taxpayer
characteristics and tax-compliance behaviors. Nearly 70 percent report that they are
homeowners. Among the homeowners, 63.4 percent indicate that they have a mortgage. Some
38.6 percent report that they use tax-preparation software or websites, and 62 percent get
assistance from an attorney, accountant, or tax advisor.
<Table 4 here>
Finally, in Table 5, we report the results of questions regarding four categories of federal
expenditure—cash payments for the poor, military expenditures, Social Security, and foreign aid.
We asked these questions because we believed that differences in attitudes toward particular
types of spending might be associated with differences in attitudes toward the taxes that are used
to finance those expenditures.
<Table 5 here>
There is considerable variation in the responses for all four of these spending categories.
Some 32 percent of respondents say that cash payments for the poor are smaller than they should
be, while 33 percent say such payments are about right, and 35 percent say they are larger than
they should be. Those who believe military expenditures are too high outnumber those who
believe military expenditures are too low, by 44.5 percent to 28.1 percent. Nearly half say that
Social Security expenditures are about right, 33.2 percent say they are less than they should be,
and 22.7 percent say they are more than they should be. Finally, 58.4 percent say that
11
expenditures on foreign aid are larger than they should be, while 26.4 percent say they are
smaller than they should be.
VII.
Econometric Issues Regarding the Sample
Our goal is to use the demographic and attitudinal variables described above, to explain the
variation in the extent to which respondents misstate their average income-tax rate. We have
described a large number of variables that could be used to explain the variation in our dependent
variable, OVERSTATEMENT, which is the number of percentage points by which we estimate
that the respondent has overstated her household’s average income-tax rate.
One important issue is sample selection. The procedures used by the State of the State
Survey provide us with a random sample of the Michigan adult population. However, as
reported above, nearly one-fourth of the respondents did not provide an estimate of their average
income-tax rate. This raises the possibility that the estimated coefficients could suffer from
sample-selection bias. To address this issue, we employ the procedure suggested by Heckman
(1979).13 The results for the equation of interest generated by the Heckman correction procedure
are substantially similar to the results produced by ordinary least squares. Therefore, in what
follows, we focus on the OLS results. Results from the Heckman procedure are available on
request.
A second important issue is the extent to which we should use the outliers. As mentioned
above, more than two percent of those who answered the question regarding their average
income-tax rate said it was 100 percent, and others gave answers that are nearly as implausible.
13
Catholics were significantly more likely to respond to the question about the average tax rate,
as were union members. Residents of small towns were significantly less likely to respond. We
use these three variables in the selection equation.
12
To the extent that these responses are meaningless noise, using them could actually undermine
our ability to uncover the true relationships between OVERSTATEMENT and the explanatory
variables of interest.
To learn more about the sensitivity of the results with respect to inclusion of outliers, we
ran a series of regressions in which the dependent variable is OVERSTATEMENT, and only
demographic variables are included on the right-hand side of the equation. The results are shown
in Table 6. As we go from left to right in Table 6, each successive column shows the results of a
regression with fewer observations than the last. These results show that the most extreme
outliers matter a great deal.
<Table 6 here>
The first column of Table 6 shows the results for the full sample, and the next column
excludes only those who reported an average tax rate of 100 percent. Even this minor change,
which excludes only a dozen observations,14 leads to substantial changes in the coefficients. If
we compare the column for the full sample with the columns that are farther to the right in Table
6, we see that the coefficient for MALE goes from insignificantly positive to significantly
negative, and the coefficient for WHITE changes from significantly negative to positive and of
marginal significance. The coefficient for NUMBER OF CHILDREN becomes insignificant, and
the coefficient for MARRIED becomes highly significant. Also, the F-statistic indicates that the
overall goodness of fit is improved as a result of deleting the more extreme outliers.
We have chosen for our central case the specification in which we exclude those who
report an average tax rate of 50 percent or more. This involves a reduction in the size of the
14
Our sample includes 15 respondents who said they have an average tax rate of 100%.
However, three of these did not give usable responses for some of the demographic variables.
13
usable sample of only about five percent, but we believe that it yields results that are much
stronger and more plausible than we would have if we were to use the entire sample. When we
include the entire sample, and include as regressors the demographic variables shown in Table 6,
nearly all of our variables for attitudes toward taxation and tax-compliance behaviors fall far
short of significance. With the restricted sample, we find that some important variables have
effects that are both statistically significant and economically meaningful.15
VIII. Regression Results
Throughout the analysis, we will continue to use the seven demographic controls shown in Table
6: MALE, YEARS OF AGE, WHITE, NUMBER OF CHILDREN, MARRIED, YEARS OF
EDUCATION, and LOG OF INCOME. As mentioned above, our preferred specification is the
one for which we exclude those who reported an average income-tax rate of 50 percent or higher.
Even when we exclude those outliers, we still are only able to find statistically significant results
for a few additional explanatory variables. In the discussion that follows, we will focus on the
three explanatory variables that produced the strongest results. These are TAX ON SIMILAR,
TAX EFFECTIVENESS, and IDEOLOGY. TAX ON SIMILAR (question #4 in Table 3) is scaled
from 1 to 5, with a higher value indicating a belief that taxes on households like their own should
be lower than they are now (i.e., taxes on households like theirs are believed to be higher than
15
In the next section, we will report the results of regressions that include the demographic
variables shown in Table 6, as well as two attitudinal variables taken from Table 3, and the
respondent’s self-reported ideology. Although our preferred specification excludes those with a
self-reported average tax rate of 50 percent or higher, the results are fairly similar (both for the
demographic and non-demographic variables) if we exclude those with an average tax rate of 40
percent or higher, or 60 percent or higher. However, if we include those who report an average
tax rate as high as 70 percent, two of the non-demographic variables lose significance. If we
include those who report a tax rate as high as 90 percent, all of the non-demographic variables
fall to insignificance. We will discuss this further below.
14
they should be). TAX EFFECTIVENESS (question #1 in Table 3) also ranges from 1 to 5; we
scaled it so that a higher value indicates a belief that the federal government spends tax dollars
ineffectively. IDEOLOGY is measured on the standard seven-point scale, where 1 indicates a
respondent who is very liberal, 4 is moderate, and 7 is very conservative.
Most respondents who provided a usable response to OVERSTATEMENT also provided
usable responses to TAX ON SIMILAR, TAX EFFECTIVENESS, and IDEOLOGY, but a few did
not. In order to isolate the effects of the independent variables themselves (as opposed to the
effects of changes in the sample), we will hereafter report the results from regressions using a
sample of 602 respondents. The included respondents are the ones who provided a usable
response to OVERSTATEMENT, all seven of the demographic controls, and all three of the
explanatory variables listed in the previous sentence. The results are shown in Table 7.
Specification (1) of Table 7 shows the results for a regression that includes the
demographic controls only. These results can be compared with those from the second column
from the right in Table 6. These two regressions have the same dependent variable and the same
set of independent variables; the only difference is that the one in Table 6 is based on a sample of
640 observations, whereas the one in Table 7 uses 602 observations. Fortunately, the signs of
the coefficients in the two regressions are identical, and the magnitudes and significance levels
are quite similar. Specifications (2), (3), (4), and (5) show the results for regressions in which
combinations of TAX ON SIMILAR, TAX EFFECTIVENESS, and IDEOLOGY have been added.
The coefficients indicate that, all else equal, older persons overstate their average
income-tax rates by fewer percentage points than younger ones, and higher-income persons
15
overstate their average tax rates by fewer percentage points than those with lower incomes.16
Specification (1) in Table 7 also reveals that, all else equal, married persons overstate their
average income-tax rates by substantially more than those who are not married. These results for
YEARS OF AGE, LOG OF INCOME, and MARRIED are robust with respect to the inclusion of
other explanatory variables.
<Table 7 here>
Four of the demographic variables do not usually rise to significance. Specifications (1)
and (2) in Table 7 show that men overstate their average tax rates by fewer percentage points
than women, although the coefficients are only marginally significant, and they shrink to
insignificance in Specifications (3), (4), and (5). In Table 7, the coefficients for WHITE are
positive but insignificant.17 The coefficients for NUMBER OF CHILDREN are also positive, but
they are only statistically significant in one of the five specifications in Table 7.18 The other
16
These estimates for YEARS OF AGE and LOG OF INCOME help to explain some of the
differences between our results and those of Gideon (2015). Gideon’s sample has a mean age of
67.9 years, whereas the mean age in our sample is 47.3 years. The median household income is
nearly 24 percent higher for Gideon’s sample than for the nation as a whole, whereas the median
household income in our sample is about five percent below the national median. If we accept
our coefficients indicating that older and higher-income respondents overstate their average
income-tax rates by less, and if we were to use a sample with Gideon’s distribution of age and
income, the degree of overstatement in our data would be reduced by about three percentage
points. However, this would still leave us with a very large degree of overstatement.
17
In Table 2, we saw that whites overstated their average income-tax rates by less than nonwhites, which would appear to conflict with the positive regression coefficients for WHITE in
Table 7. The difference is explained primarily by the fact that non-whites are heavily
represented among those who reported an average income-tax rate of 50 percent or higher.
These observations are included in the averages shown in Table 2, but they are excluded from
the regressions.
18
If we use the full sample (including those with self-reported average tax rates all the way up to
100 percent), NUMBER OF CHILDREN was the only variable for which the coefficients were
consistently statistically significant. (The coefficients indicated that those with a larger number
of children overstated their taxes to a larger extent than those with fewer or no children.)
16
demographic variable that does not typically achieve significance in Table 7 is YEARS OF
EDUCATION. In our data set, YEARS OF EDUCATION and LOG OF INCOME are highly
correlated with each other (the weighted correlation coefficient is 0.444). When the income
variable is not included, the coefficient for the education variable indicates that those with more
education overstate their average income-tax rates by fewer percentage points than those with
less education. However, when the income variable is included in the regression, the education
variable changes sign.
Among the non-demographic variables, by far the strongest and most statistically
significant effect is for TAX ON SIMILAR. The positive coefficients indicate that, all else equal,
those who believe that the taxes paid by households like theirs are too high overstate their
average income-tax rate to a greater degree. This result accords with our expectations. The
coefficients for TAX ON SIMILAR are significant at the one-percent level in every specification
that we have tried. This cannot be said for any other explanatory variable, except for some of the
demographic controls discussed earlier. The estimated coefficients for TAX ON SIMILAR take
on values around 2. This means that, all else equal, a respondent who says that the taxes on
households similar to his should be much lower than they are now would be expected to
overstate the average income-tax rate by roughly eight percentage points more than a respondent
who says that such taxes should be much higher than they are now.
Another explanatory variable with a significant effect on OVERSTATEMENT is TAX
EFFECTIVENESS. The coefficients are positive, indicating that those who believe tax dollars
are spent ineffectively overstate their own average income-tax rate to a greater extent than those
who believe tax dollars are spent effectively. This result also accords with our expectations. The
coefficients suggest that, all else equal, a respondent who says that tax dollars are spent very
17
ineffectively would be expected to overstate her household’s average income-tax rate by roughly
four percentage points more than a respondent who says that tax dollars are spent very
effectively.
The coefficients for IDEOLOGY are negative. This indicates that, all else equal,
conservatives overstate their average income-tax rates by fewer percentage points than liberals.
When IDEOLOGY is the only explanatory variable other than the demographic controls, its pvalue is 0.061. However, when it is combined with either TAX ON SIMILAR or TAX
EFFECTIVENESS, the coefficients on IDEOLOGY are increased in both magnitude and
significance.
The negative coefficients for IDEOLOGY may seem surprising, in view of the positive
coefficients for TAX ON SIMILAR and TAX EFFECTIVENESS. The attitudes expressed by those
with a high value for TAX ON SIMILAR or TAX EFFECTIVENESS are common among
conservatives. (The correlation between IDEOLOGY and TAX EFFECTIVENESS is about 0.25,
and the correlation between IDEOLOGY and TAX ON SIMILAR is about 0.08.) Of course, the
coefficients for IDEOLOGY come from regressions that also control for the other covariates.
Beyond that, however, even the simple univariate relationship between IDEOLOGY and
OVERSTATEMENT is negative. This may indicate that conservatives pay closer attention to
taxes. But conservatives still overstate their average tax rates by a substantial amount; the mean
value of OVERSTATEMENT is about 12.8 for conservatives and about 14.4 for liberals.
When included along with the demographics, most of the other variables fall short of
statistical significance. Respondents’ views about Social Security, military spending, cash
payments for the poor, and foreign aid had little power in explaining the misstatements of
18
average income-tax rates. Similarly, tax-compliance behaviors, such as the use of software or
assistance, had insignificant effects. Political-party affiliation also had no significant effects.
As mentioned above, our preferred specification is the one in which we exclude those
respondents whose self-reported average tax rate was 50 percent or higher. However, we have
also run the regressions shown in Table 7 for different values of this parameter. The results are
quite similar when we exclude only those who report an average tax rate of 60 percent or higher,
and fairly similar when we exclude those with a tax rate of 40 percent or higher. When we
exclude only those with a tax rate of 80 percent or higher, the coefficients for TAX ON SIMILAR
are still statistically significant, but the coefficients for TAX EFFECTIVENESS and IDEOLOGY
become insignificant. When we use the entire sample, or exclude only those who reported a tax
rate of 100 percent, even the coefficients for TAX ON SIMILAR are insignificant.
The survey was conducted in the summer and fall of 2013, a few months after most
respondents would have filed their 2012 income-tax returns. The results above are based on the
tax law for 2012, but we have also performed our calculations using 2013 tax law. Between
2012 and 2013, there were changes in the personal exemption and standard deduction, and in the
thresholds for the various marginal tax rates. However, these changes were sufficiently small
that our estimates of households’ true average tax rates changed very little. As a result, the
values for OVERSTATEMENT changed very little, so that the regression coefficients using 2013
tax law are very close to the coefficients using 2012 tax law.
When we asked the respondents for their average income-tax rate, we did not explicitly
request non-negative answers. Nevertheless, none of the respondents provided a negative
number, even though the Earned Income Tax Credit means that the true average tax rate can be
negative. The results presented above are based on calculations that ignore the EITC. If we
19
include the EITC in the calculations, we do estimate that a substantial number of our respondents
actually have negative average tax rates. The EITC increases our estimates of the extent to
which low-income respondents overstate their tax rates. As a result, both the mean and variance
of OVERSTATEMENT are increased. When we run the regressions shown in Table 7 using the
version of OVERSTATEMENT that includes the EITC, the overall character of the results does
not change a great deal. For most variables, the estimated coefficients are of the same sign and
similar magnitude and level of significance. One exception is that (not surprisingly) the
coefficients for LOG OF INCOME increase dramatically, more than doubling in magnitude. The
R-squared is substantially higher for the regressions that include the EITC than for those that do
not.
The results in Table 7 are for OLS regressions. As mentioned above, we also ran
regressions with the Heckman correction for sample-selection bias. The signs, magnitudes, and
significance levels of the coefficients are generally quite similar between the OLS and Heckman
versions. One notable exception occurs when we use the Heckman correction for the
combination of variables that corresponds to Specification (2) in Table 7. TAX
EFFECTIVENESS is marginally significant in the OLS version, but falls well short of
significance when the Heckman procedure is employed. Except for that case, the coefficients
that emerge from the two versions for TAX ON SIMILAR, TAX EFFECTIVENESS, and
IDEOLOGY are very similar.
In the last few paragraphs, we have reported on the sensitivity of our results with respect
to (a) the extent to which we exclude the observations for which the respondent’s self-reported
average income-tax rate is very high, (b) the year from which the tax parameters are drawn, (c)
20
whether we include the EITC in the calculations, and (d) the Heckman correction. For all of
these robustness checks, additional results are available upon request.
IX.
Conclusion
In this paper, we use data from a survey of the Michigan adult population to investigate
respondents’ beliefs about their average tax rates in the federal individual income tax. We find
that 86 percent of respondents overstate their actual average income-tax rate, often by very large
amounts. We estimate that the median overstatement is 12.1 percentage points, and the mean
overstatement is 14.9 percentage points. Our regression results indicate that, all else equal, older
respondents overstate their average income-tax rate significantly less than younger ones, and
higher-income respondents overstate by less than those with lower incomes. Those who believe
that the taxes paid by households similar to theirs should be lower overstate their average
income-tax rate significantly more, after controlling for a variety of other covariates. Also, those
who believe that tax dollars are spent ineffectively overstate their average tax rates more than
those who believe that tax dollars are spent effectively.
At this point, it is not clear whether the economics profession has arrived at a solid
consensus regarding perceptions of either average or marginal income-tax rates. Even the
average direction of those misperceptions may not be settled, especially for perceptions of
marginal tax rates. Most studies of average tax rates have found a tendency toward
overstatement, on average, and our results are consistent with that. Thus we believe we may be
contributing to an emerging consensus that taxpayers tend, on average, to overstate their average
income-tax rates. However, we find larger overstatements than previous researchers have found.
21
It does seem clear that there is tremendous variation in public perceptions of tax rates, and that
some of the misperceptions can be very large.
Our results can be seen in the context of a larger literature in the social sciences, in which
researchers have uncovered ample evidence that a large portion of the public is remarkably
uninformed or misinformed regarding basic facts about the society and economy. For example,
as mentioned above, the survey used for our research has also found evidence of large
overstatements of the sizes of minority populations, as have other studies. Gallup and Newport
(1990) report that “The average American thinks that America is 32% black, 21% Hispanic, and
18% Jewish.”
Lack of information and misinformation are also widespread with respect to political
issues and institutions. In considering the results of surveys spanning six decades, Delli Carpini
and Keeter (1996) find that Americans have good knowledge in some areas (e.g., 99 percent of
the respondents to a 1986 survey could identify the President of the United States), but poor
knowledge in others (e.g., only 12 percent of the respondents to a 1986 survey knew that the
Supreme Court does not review all federal cases).
With regard to economic issues, large misperceptions are equally widespread. For
example, Walstad’s (1997) results from a 1992 survey of economic literacy reveals a substantial
lack of knowledge of the nature of fiscal policy, monetary policy, budget deficits, and other
important economic phenomena. The Kaiser Family Foundation (2013) found that the average
American believes that 28 percent of the federal budget is spent on foreign aid, whereas the
correct figure is about one percent.
Slemrod (2006) presents evidence that people believe, contrary to fact, that the existing
income tax is regressive, and that high-income people would pay more under a flat tax. This
22
misperception appears to explain some of the support for a flat tax. Slemrod and Bakija (2004)
report on a 1989 survey, which suggests that the public believes that 45 percent of millionaires
pay no income tax at all, whereas Internal Revenue Service data show that the correct figure is
below 2 percent. Slemrod also finds that similar misconceptions about the estate tax explain
some of the support for eliminating it—about half of Americans apparently believe that most
families have to pay the estate tax, whereas only a tiny fraction actually pay. Bartels (2005)
shows that many Americans do not seem to have comprehended the highly regressive nature of
the 2001 and 2003 tax cuts.19
Most research papers on the economics of taxation, including many written by the
authors of this paper, contain the assumption (usually implicit) that taxpayers perceive taxes
accurately. However, our research suggests that this is not the case for a large fraction of the
public. This has implications for our understanding of the true effects of taxes, although we urge
caution in drawing strong conclusions. If taxpayers truly perceive their taxes to be higher than
they actually are, it is possible that taxes will have larger real effects than they would have if the
perceptions were accurate. However, the errors that we report here are sufficiently large that it is
possible to conclude that many taxpayers are merely in a fog about taxes. If that is the case, then
a possible conclusion is that many taxpayers’ behavioral responses to taxes may be quite
different from the responses that would be predicted by standard models of rational behavior. In
the words of an early contributor to this literature, “the ignorance appears so nearly total that one
suspects taxation is treated like an act of God that has no effect on rational calculations” (Brown
(1969)). As suggested by Hoopes, Reck, and Slemrod (2015), ignorance may be rational. But
ignorance is ignorance, regardless of whether it is rational.
19
See Lupia, Levine, Menning, and Sin (2007) for an informative critique of Bartels.
23
We conclude by issuing a call for four things to happen. First, we hope that our work
will stimulate further research on perceptions of tax rates, and on the forces that drive those
perceptions. Second, since we believe that democracies benefit from an informed public, we
hope that policy makers will commit public resources more strongly to civic education. Third,
we believe that economists still have a good deal of work to do, to refine our models to account
for economic agents who are ill-informed and/or innumerate. Our final hope flows from the
third one-- we believe that the economics profession could benefit from a higher level of
humility.
24
Disclosures
The authors have no financial arrangements that might give rise to conflicts of interest with
respect to the research reported in this paper.
25
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29
Table 1
Selected Characteristics from the Fall 2013 State of the State Survey (SOSS) and
2009 American Community Survey (National and State, Five-Year Estimates),
Reported as Percentages Unless Otherwise Specified
SOSS
Michigan
USA
3.6
13.0
2.7
4.9
76.4
2.3
14.0
0.5
1.5
79.7
4.4
12.4
0.8
5.7
74.5
2.8
4.0
15.1
Sex
Female
Male
51.8
48.2
50.8
49.2
50.7
49.3
Household Income
Below $10,000
$ 10,000 - $ 20,000
$ 20,000 - $ 30,000
$ 30,000 - $ 40,000
$ 40,000 - $ 50,000
$ 50,000 - $ 60,000
$ 60,000 - $ 70,000
$ 70,000 - $ 90,000
$ 90,000 - $100,000
$100,000 - $150,000
Above $150,000
3.6
8.9
10.4
9.1
10.2
8.2
9.7
15.9
2.4
11.6
10.0
Race
Asian
Black
Native American
Other
White
Ethnicity
Hispanic
30
Median
$48,700
Median
$51,425
Table 2
Estimated Mean Overstatement of Percent of Household Income Paid in
Federal Income Tax by Michigan Residents, For a Variety of Subgroups
(Source: State of the State Survey and Authors’ Calculations)
Group
All
Mean Overstatement
(In Percentage Points)
14.9
Male
Female
14.5
15.2
White
Black
Asian
Hispanic
12.9
22.6
19.5
29.3
Age 18-29
Age 30-64
Age 65 and over
13.5
15.9
10.0
Bachelor’s Degree or Higher
Less than Bachelor’s Degree
12.6
16.9
Democrat
Independent
Republican
15.8
14.3
14.6
Married
Divorced, Widowed, Separated
Single
15.1
10.8
17.8
Rural
Small Town
Suburb
Urban
14.5
13.2
14.6
19.6
31
Table 3
Michigan Residents’ Perceptions of the Tax System
(Source: State of the State Survey)
1. Tax Effectiveness
“Overall, how well do you think the federal government spends your tax dollars? Would
you say it is spent very effectively, somewhat effectively, somewhat ineffectively, or
very ineffectively?”
Very effectively
3.3%
Somewhat effectively
19.6
Neither effectively nor ineffectively (volunteered)
1.0
Somewhat ineffectively
37.6
Very ineffectively
38.4
2. Tax on High Income
“When you think about high-income households, do you think the percentage they pay in
federal income tax should be much higher than it is now, somewhat higher than it is now,
somewhat lower than it is now, much lower than it is now, or is about right?”
Much higher than it is now
12.6%
Somewhat higher than it is now
33.2
About right
32.1
Somewhat lower than it is now
15.5
Much lower than it is now
6.7
3. Tax on Low Income
“When you think about low-income households, do you think the percentage they pay in
federal income tax should be much higher than it is now, somewhat higher than it is now,
somewhat lower than it is now, much lower than it is now, or is about right?”
Much higher than it is now
1.6%
Somewhat higher than it is now
10.0
About right
36.9
Somewhat lower than it is now
32.7
Much lower than it is now
18.8
4. Tax on Similar Households
“When you think about households like yours, do you think the percentage they pay in
federal income tax should be much higher than it is now, somewhat higher than it is now,
somewhat lower than it is now, much lower than it is now, or is about right?”
Much higher than it is now
1.1%
Somewhat higher than it is now
3.9
About right
49.4
Somewhat lower than it is now
34.1
Much lower than it is now
11.5
32
Table 3 (continued)
5. Tax Comparison with Other Countries
“How do you think the overall level of taxes in the United States compares to the overall
level of taxes in other affluent countries, like Canada, Germany, and Japan? Would you
say that taxes in the U.S. are much higher than taxes in these other countries, somewhat
higher, about the same, somewhat lower, or much lower?”
Much higher
10.0%
Somewhat higher
25.0
About the same
19.5
Somewhat lower
31.7
Much lower
13.9
33
Table 4
Michigan Residents’ Taxpayer Characteristics
(Source: State of the State Survey)
1. Homeowner
“Do you own your own home?”
Yes
No
69.7%
30.3
2. Mortgage (asked only of homeowners)
“Are you currently paying on a mortgage on your home?”
Yes
No
63.4%
36.6
3. Own Tax Preparer
“In your household, are you responsible for preparing income-tax returns?”
Yes
60.3%
No
38.0
Responsibility Shared with another Household Member 1.8
4. Software
“When filing your income-tax returns, does your household use tax-preparation software
or websites, such as TurboTax?”
Yes
38.6%
No
61.4
5. Tax Assistance
“When filing your income-tax returns, does your household get assistance from a tax
accountant or attorney, or advisor at a company like H&R Block?”
Yes
62.0%
No
38.0
34
Table 5
Michigan Residents’ Views toward Federal Spending Programs
(Source: State of the State Survey)
1. Cash Payments for Poor
Much less than they should be
Somewhat less than they should be
About right
Somewhat more than they should be
Much more than they should be
11.2%
20.8
32.8
20.9
14.2
2. Military Expenditures
Much less than they should be
Somewhat less than they should be
About right
Somewhat more than they should be
Much more than they should be
11.5%
16.6
27.4
20.2
24.3
3. Social Security
Much less than they should be
Somewhat less than they should be
About right
Somewhat more than they should be
Much more than they should be
12.8%
20.4
44.1
14.1
8.6
4. Foreign Aid
Much less than they should be
Somewhat less than they should be
About right
Somewhat more than they should be
Much more than they should be
15.0%
11.4
15.2
20.6
37.8
35
Table 6
Regression Results for Effects of Demographic Variables on Overstatement of
Average Federal Income-Tax Rate: Sensitivity to Inclusion of Outliersa
Independent
Variable
MALE
YEARS OF
AGE
WHITE
NUMBER OF
CHILDREN
MARRIED
YEARS OF
EDUCATION
LOG OF
INCOME
CONSTANT
N
R-Squared
Prob > F
Full
Sample
0.127
(1.677)
-0.001
(0.056)
-7.222**
(3.426)
2.788***
(1.086)
1.863
(2.284)
-0.801
(0.439)
-1.165
(1.391)
33.629***
(8.294)
673
0.0838
0.0117
Exclude
Those
With
Average
Tax Rate
Of 100%
-1.918
(1.327)
-0.063*
(0.038)
-2.176
(2.825)
1.470**
(0.666)
4.102**
(1.601)
-0.098
(0.292)
-2.126*
(1.120)
25.026***
(5.918)
661
0.0615
0.0009
Exclude
Those
With
Average
Tax Rate
Above 79%
-2.291**
(1.050)
-0.067**
(0.034)
0.803
(1.838)
1.101*
(0.578)
4.836***
(1.336)
0.163
(0.245)
-2.538***
(0.831)
19.738***
(4.096)
656
0.0823
0.0000
a
Exclude
Exclude
Exclude
Those
Those
Those
With
With
With
Average
Average
Average
Tax Rate
Tax Rate
Tax Rate
Above 59% Above 49% Above 39%
-2.307**
-2.095**
-2.088**
(0.945)
(0.930)
(0.913)
-0.076**
-0.083***
-0.085***
(0.032)
(0.031)
(0.030)
2.291
2.319*
2.604*
(1.429)
(1.406)
(1.349)
0.574
0.648
0.695
(0.408)
(0.407)
(0.404)
5.054***
5.062***
5.069***
(1.156)
(1.131)
(1.111)
0.227
0.297
0.333
(0.241)
(0.235)
(0.232)
-2.321***
-2.364***
-2.321***
(0.787)
(0.775)
(0.759)
16.876***
15.779*** 14.448***
(3.562)
(3.468)
(3.412)
651
640
624
0.0947
0.1075
0.1243
0.0000
0.0000
0.0000
Standard errors are in parentheses. Two-tailed significance levels are indicated as: *=10%,
**=5%, and *** =1%.
36
Table 7
Regression Results for Effects of Taxpayers’ Perceptions of the Tax System on
Overstatement of Average Federal Income-Tax Ratea
Independent
Variable
MALE
YEARS OF AGE
WHITE
NUMBER OF
CHILDREN
MARRIED
YEARS OF
EDUCATION
LOG OF INCOME
Specification
(1)
-1.653*
(0.909)
-0.103***
(0.030)
1.555
(1.293)
0.550
(0.409)
4.616***
(1.072)
0.359
(0.236)
-2.196***
(0.682)
TAX ON
SIMILAR
TAX
EFFECTIVENESS
IDEOLOGY
CONSTANT
N
R-Squared
Prob > F
16.173***
(3.610)
602
0.1019
0.0000
Specification
(2)
-1.571*
(0.907)
-0.106***
(0.029)
1.459
(1.299)
0.447
(0.391)
4.707***
(1.095)
0.453**
(0.231)
-2.023***
(0.683)
1.852***
(0.623)
0.700*
(0.387)
Specification
(3)
-1.051
(0.913)
-0.095***
(0.030)
1.678
(1.291)
0.592
(0.396)
5.079***
(1.068)
0.325
(0.233)
-2.182***
(0.682)
2.242***
(0.615)
-0.595***
(0.219)
10.316**
(4.281)
602
0.1413
0.0000
5.087
(4.473)
602
0.1347
0.0000
a
Specification
(4)
-1.258
(0.912)
-0.089***
(0.030)
0.978
(1.256)
0.667*
(0.389)
4.755***
(1.071)
0.367
(0.234)
-2.133***
(0.688)
1.198***
(0.394)
-0.654**
(0.232)
13.284***
(3.961)
602
0.1298
0.0000
Specification
(5)
-1.053
(0.910)
-0.092***
(0.030)
1.260
(1.269)
0.602
(0.385)
4.994***
(1.079)
0.380
(0.231)
-2.087***
(0.686)
1.983***
(0.617)
0.949**
(0.397)
-0.714***
(0.231)
6.982**
(4.418)
602
0.1528
0.0000
Standard errors are in parentheses. Two-tailed significance levels are indicated as: *=10%,
**=5%, and *** =1%.
37
Figure 1
Michigan Residents' Perceptions
Of Their Average Tax Rate
In the Federal Individual Income Tax
Percent of Respondents
35
31.8
30
30.7
25
20
15
10.9
10
10.6
8.1
5
2.9
0.6
0.4
1.3
0
Self-Reported Average Tax Rate (in Percent)
38
2.3
0.3
Percent With Overstatement in this Range
Figure 2
Distribution of the Estimated Number of Percentage Points
By which Michigan Residents Overstate Their Average Tax Rate
In the Federal Individual Income Tax
40
34.0
35
29.7
30
25
20
14.5
15
11.1
10
5
1.3
2.4 1.3
1.3
0
1.3
0.1 1.0 1.0 1.1
Number of Percentage Points of Overstatement
39