Measuring “Schmeduling”

56 Pages Posted: 5 Dec 2016

See all articles by Alex Rees-Jones

Alex Rees-Jones

Cornell University - Department of Economics; National Bureau of Economic Research (NBER)

Dmitry Taubinsky

Harvard University

Date Written: December 2016

Abstract

What mental models do individuals use to approximate their tax schedule? Using incentivized forecasts of the U.S. Federal income tax schedule, we estimate the prevalence of the “schmeduling” heuristics for constructing mental representations of nonlinear incentive schemes. We find evidence of widespread reliance on the “ironing” heuristic, which linearizes the tax schedule using one’s average tax rate. In our preferred specification, 43% of the population irons. We find no evidence of reliance on the “spotlighting” heuristic, which linearizes the tax schedule using one’s marginal tax rate. We show that the presence of ironing rationalizes a number of empirical patterns in individuals’ perceptions of tax liability across the income distribution. Furthermore, while our empirical framework accommodates a rich class of other misperceptions, we find that a simple model including only ironers and correct forecasters accurately predicts average underestimation of marginal tax rates. We replicate our finding of prevalent ironing, and a lack of other systematic misperceptions, in a controlled experiment that studies real-stakes decisions across exogenously varied tax schedules. To illustrate the policy relevance of the ironing heuristic, we show that it augments the benefits of progressive taxation in a standard model of earnings choice. We quantify these benefits in a calibrated model of the U.S. tax system.

Suggested Citation

Rees-Jones, Alex and Taubinsky, Dmitry, Measuring “Schmeduling” (December 2016). NBER Working Paper No. w22884. Available at SSRN: https://ssrn.com/abstract=2880323

Alex Rees-Jones (Contact Author)

Cornell University - Department of Economics ( email )

Ithaca, NY 14853
United States

HOME PAGE: http://www.alexreesjones.com

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Dmitry Taubinsky

Harvard University ( email )

Cambridge, MA
United States

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