Firms' Tax Rate Misperception: Measurement, Drivers, and Distortionary Effects

66 Pages Posted: 13 Dec 2022 Last revised: 11 Jan 2023

See all articles by Martin Fochmann

Martin Fochmann

Free University of Berlin

Vanessa Heinemann-Heile

Paderborn University

Ralf Maiterth

Humboldt University of Berlin

Hans-Peter Huber

Humboldt University of Berlin - School of Business and Economics

Caren Sureth-Sloane

Paderborn University; Vienna University of Economics and Business; TRR 266 Accounting for Transparency

Date Written: December 12, 2022

Abstract

Decisions-makers in firms are expected to use perceived rather than actual tax rates and hence their decisions can be substantially biased by misperception. We quantify firms’ misperception of their average tax rate (ATR) and marginal tax rate (MTR) and identify drivers of this tax rate misperception. Using survey data on German firms, we find that the share of firms considerably misperceiving their ATR and MTR exceeds 65% and 57% respectively. Further, we illustrate firms’ impaired comprehension of the tax schedule reflected by the relation between ATR and MTR. We find sole proprietorships and partnerships on average considerably overestimate their ATR anchoring at the top marginal tax rate. While corporations show no uniform tax misperception patterns for retained profits, they tend to strongly underestimate ATRs and MTRs on distributed profits. Irrespective of the legal form, we find misperception is mainly driven by tax regime complexity, lack of tax knowledge and dissatisfaction with the tax system. Surprisingly, even though many firms report using the ATR instead of the appropriate MTR in their investment and financing decisions, which suggests that they underestimate their tax burden, this bias is partially attenuated by their ATR misperception. Overall, our findings demonstrate that policymakers and researchers can benefit from incorporating firms’ tax rate misperception when estimating firms’ tax response and evaluating tax policies.

Keywords: Tax Misperception, Business Taxation, Survey, Tax Policy

JEL Classification: H25, H32, D91, M41

Suggested Citation

Fochmann, Martin and Heinemann-Heile, Vanessa and Maiterth, Ralf and Huber, Hans-Peter and Sureth-Sloane, Caren, Firms' Tax Rate Misperception: Measurement, Drivers, and Distortionary Effects (December 12, 2022). TRR 266 Accounting for Transparency Working Paper Series No. 108, WU International Taxation Research Paper Series No. 2022-12, Available at SSRN: https://ssrn.com/abstract=4300919 or http://dx.doi.org/10.2139/ssrn.4300919

Martin Fochmann

Free University of Berlin ( email )

Thielallee 73
Accounting and Taxation
Berlin, 14195
Germany

Vanessa Heinemann-Heile

Paderborn University ( email )

Warburger Str. 100
Paderborn, 33098
Germany

Ralf Maiterth

Humboldt University of Berlin ( email )

Unter den Linden 6
Berlin, AK Berlin 10099
Germany

Hans-Peter Huber

Humboldt University of Berlin - School of Business and Economics ( email )

Spandauer Str. 1
Berlin, D-10099
Germany

Caren Sureth-Sloane (Contact Author)

Paderborn University ( email )

Warburger Str. 100
Paderborn, 33098
Germany

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

TRR 266 Accounting for Transparency ( email )

Warburger Straße 100
Paderborn, 33098
Germany

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