Decision heuristics and tax perception – An analysis of a tax-cut-cum-base-broadening policy |
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Institution: | 1. Department of Paediatric, Gynaecological, Microbiological and Biomedical Sciences, University of Messina, Messina, Italy;2. Department of Infectious Diseases, University of Messina, Messina, Italy;1. Carnegie Mellon University-Qatar, Qatar;2. Carnegie Mellon University and NBER, United States;3. University of Florida, United States |
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Abstract: | In this paper, both a conjoint analysis and a lab experiment are conducted to analyze the influence of changes in the tax rate and the tax base on the perceived tax burden. Our results show that the majority of individuals do not make rational tax decisions based on the actual tax burden but rather use simple decision heuristics. This leads to an irrationally high impact of changes in nominal tax rates on the perceived tax burden. Taxpayers favor tax options that apply a lower tax rate on their gross income over a higher tax rate applied on their net income despite the lower actual tax burden of the latter option. This result suggests that politicians could combine increasing fiscal revenues and decreasing subjects’ tax perception. Furthermore, overestimation of tax rate changes increases considerably when information on tax rate is considered first (framing effect). |
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