Perception and Judgment of Marginal Tax Rates After a Tax Reduction

Abstract

Between 1983 and 1985, most marginal income tax rates were reduced in Sweden. Attitudes towards taxes had repeatedly been found to be very negative and marginal tax rates were assumed to be considered so unreasonably high by the general public that the national economy was ill-effected. The purpose of the tax reform was to reduce the unreasonableness of marginal tax rates in order to stimulate economic behaviour that would benefit the whole economy.

Through four successive surveys during the first phase of the tax reform, it was found that the cuts in marginal income tax rates were only partly perceived, not at once, and not at the same time by everybody. The time-lag was at least one year for any change to be perceived. At the same time, no reduction in the experienced unreasonableness of taxes could be observed, measured as the average difference between perceived marginal income tax rates and the corresponding marginal income tax rates considered reasonable at various income levels; nor were any changes found in the respondents’ qualitative opinions about the Swedish income taxes.

By a system analysis technique — PLS (Partial Least Squares) — 38% of the variance in the theoretical construct “experienced unreasonableness of marginal tax rates” was explained. The variables having the greatest direct and indirect impact upon the dependent variable were misperception of tax rates (the tendency to over- or underestimate tax rates in general), general attitudes towards taxes, political affiliation, the perceived height of one’s own marginal tax rate, and attitudes towards tax evasion.