Measuring "Schmeduling".
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 widesp...
| Published in: | Review of Economic Studies Vol. 87; no. 5; pp. 2399 - 2439 |
|---|---|
| Main Authors: | , |
| Format: | Article |
| Published: |
Oxford University Press / USA
Oct2020
|
| Subjects: | |
| Online Access: | View this record in EBSCOhost |
| fields | @attributes: recordID: 1 pdfLink: plink: https://search.ebscohost.com/login.aspx?direct=true&db=ssf&AN=145432809&site=ehost-live header: @attributes: shortDbName: ssf uiTerm: 145432809 longDbName: Social Sciences Full Text (H.W. Wilson) uiTag: AN controlInfo: bkinfo: jinfo: jid: 00346527 REM jtl: Review of Economic Studies issn: 00346527 maglogo: N pubinfo: dt: Oct2020 vid: 87 iid: 5 pid: 622 pub: Oxford University Press / USA artinfo: ui: 145432809 10.1093/restud/rdz045 ppf: 2399 ppct: 40 formats: tig: atl: Measuring "Schmeduling". aug: au: Rees-Jones, Alex Taubinsky, Dmitry affil: Cornell University and NBER University of California, Berkeley and NBER su: Income inequality Income tax Tax rates Patterns (Mathematics) Mental representation sug: subj: Income inequality Income tax Tax rates Patterns (Mathematics) Mental representation ab: 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. pubtype: Academic Journal doctype: Article src: R language: English refInfo: copyright: @attributes: flag: N holdings: @attributes: islocal: N |
|---|