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Do People Confuse Average and Marginal Tax Rates? Evidence from a Field Experiment

9 Pages Posted: 9 Mar 2017  

Daniel L. Chen

Toulouse School of Economics / Institute for Advanced Study / University of Toulouse; LWP, Harvard Law School, Harvard University

Date Written: March 7, 2017

Abstract

The purpose of this experiment is to see if people react to labor market schedules in a manner that suggests confusion between average and marginal tax rates. I present individuals with identical payment schedules for data entry of a series of paragraphs, making it arguably harder for individuals to be confused by average or marginal payment schemes. If people “iron”, then individuals presented with payment schedules displaying average payment rates should do more work than individuals presented with payment schedules displaying marginal payment rates. My first experiment demonstrates this. A natural follow-up question is whether individuals still “iron” when they are not presented with either average or marginal payment schedules. This may more accurately reflect an actual real-world setting where schedules are often hidden and difficult to compute. My second experiment finds that when workers are not primed with per paragraph payments, they enter significantly more paragraphs than when they are shown either average or marginal payment schedules.

Keywords: labor markets, tax rates, field experiment, average tax rates, marginal tax rates

JEL Classification: D31, D71, D72, D78, I38, Z12

Suggested Citation

Chen, Daniel L., Do People Confuse Average and Marginal Tax Rates? Evidence from a Field Experiment (March 7, 2017). Available at SSRN: https://ssrn.com/abstract=2928795

Daniel Chen (Contact Author)

Toulouse School of Economics / Institute for Advanced Study / University of Toulouse ( email )

21 allée de Brienne
31015 Toulouse cedex 6 France
Toulouse, 31015
France

LWP, Harvard Law School, Harvard University ( email )

8 Mt. Auburn St., 1st Floor
Cambridge, MA 02138
United States

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