No. 54: (Mathematical) Complexity and Preferences for Taxation: The Case of Wealth Taxation

Abstract

It is well documented that humans have difficulties in understanding nonlinear growth. This paper explores to what extent this type of bounded rationality translates into preferences for specific wealth-tax designs. In particular, we quantify shifts in stated preferences for wealth taxation caused by misperceived burden consequences of commonly politically discussed tax parameters: tax allowances and tax rates. For this, we conducted a randomized survey experiment with over 1,200 respondents in Germany. In a 2×2 design, our respondents were randomly selected to indicate both their preferred tax allowance and tax rate for either a yearly or a one-time wealth tax. Our treatment group was provided with easy-to-understand information on the resulting total tax burden for the respective wealth tax instrument. We find the preferred effective tax rate drops by almost 15 percentage points for a yearly wealth tax if our participants are fully informed, whereas we do not find this effect for the one-time wealth tax. We argue that both the total tax burden and the perceived feasibility of single payments are factors that form preferences for tax parameters.