Our tax ignorance

Stefanie Stantcheva is a Harvard Professor who does some interesting work on taxes – and that says a lot because in my view tax policy is amongst the most boring subjects I can imagine. Yet, she works on taxes with the aim of eliciting how people perceive taxes and how this perception of taxes shapes our public discourse on it. In a recent paper, she investigated the different perceptions about taxes amongst Republican and Democratic voters in the United States. Few surprises there because her results confirmed what we already knew. People on the left view income taxes mostly through the redistribution lens, emphasising the need to help poorer people in society and reduce income inequality. People on the right, on the other hand, view income taxes mostly as a way to enable wasteful government spending. Similarly, people on the left view estate taxes as a way to reduce wealth inequality while people on the right view estate taxes mostly as a form of double taxation.

However, we could probably all get to better compromises if we had the correct perception of how high taxes really are, how high they were in the past, and how many people are affected by them. Because she documents a stunning amount of ignorance about taxes on both sides of the political spectrum that simply enforces the stereotypes of both conservatives and liberals. The chart below shows the average estimate of Americans for a number of tax-related figures (blue) to the correct answer (orange).

In 1950, a time with much higher economic growth and much lower income inequality than today, the top income tax bracket had to pay a tax rate of 91% compared to 37% today. Yet, people tend to think that the top income tax rate was about the same 70 years ago as it is today. Another misperception is that people think that about one in five people in the United States is subject to the top tax bracket when in truth it is only one in 100. No wonder there is so much public support for lowering taxes. If you think 20% of all people are subject to the top income tax bracket you think it is pretty likely that you will be subject to it to at some point. So, you vote for lower taxes. Similarly, people tend to think that the top income tax bracket kicks in at an annual income of less than $200,000 when in fact it only kicks in at $600,000.

Beliefs about income taxes in the US

Source: Stantcheva (2020). Note: blue bars are survey responses (dotted lines represent median response) and orange bars are the correct answers.

The situation gets worse in the case of estate taxes. People think that on average a little bit more than one in three households is subject to estate taxes. In reality, the estate taxes in the United States have been undermined so effectively for so long that it isn’t even 1% of US households that are subject to estate taxes. But now, only 0.1% of all US households pay estate taxes. The estate tax has effectively been abolished in the United States. 

Beliefs about estate taxes in the US

Source: Stantcheva (2020). Note: blue bars are survey responses (dotted lines represent median response) and orange bars are the correct answers.

I don’t have numbers for other countries, but I guess the situation is comparable in other Western countries. The problem is that these misperceptions fuel political divides and politicians are all too happy to use them to their advantage. If there only was a place where people could learn about taxes and their impact on society. Maybe a building where we could send children and teenagers to learn about these things to make them better citizens and inoculate them against populism and political division. Hey, wait…