Everyone Gets This Tax Question Wrong: Here’s Why it Matters

Americans jump to the wrong conclusions, and it impacts how they view tax policy.

Everyone Gets This Tax Question Wrong: Here’s Why it Matters Photo by Stokkete / Shutterstock.com

The vast majority of Americans believe they pay a lot more in federal income taxes than they actually do, based on recent research.

About 85 percent of folks overstated their average income tax rate — by 11.6 percentage points, on average — in a survey and analysis out of Michigan State University that is due to be published in the National Tax Journal.

To put that another way, study co-author and MSU professor of economics Charles Ballard explains:

“We estimated that the actual average federal income tax rate for this sample [of survey respondents] is about 13.9 percent, whereas they reported their tax rate to be about 25.5 percent, on average. Thus, on average, the respondents to our survey thought they pay almost twice as much as they actually pay.”

For the study, 978 Michigan residents were polled. With ages ranging from 18 to 92, this demographic is considered reflective of the U.S. as a whole. The researchers also note that this sample of respondents is larger than that of past studies on the same topic.

The key question asked of survey respondents was: “What percentage of your household’s income would you say is paid in federal income tax?”

Why Americans overstate their taxes

Another part of the research looked at factors that could contribute to the overstating of taxes.

The researchers found that, all other factors being equal, the folks who tend to overstate their average tax rates to a greater extent are those who:

  • Believe federal income taxes on households like theirs should be lower.
  • Get tax-preparation assistance from an accountant, lawyer or adviser.
  • Believe federal tax dollars are spent ineffectively.

What it means for you

So, why does it matter that so many Americans apparently believe they give twice as much of their income to the federal government for income taxes as they actually do?

According to the study, if you are mistaken about your average tax rate, you will be prone to erroneous beliefs about the distribution of the tax burden. That could in turn affect your attitude about and even how you vote on tax policy.

As Sanjay Gupta, study co-author and dean of MSU’s Broad College of Business, explains:

“Our research shows that taxpayers don’t have a clear understanding of their own income taxes or our tax system, which is problematic. The public policy debate on taxes is very active right now, and Americans’ understanding of tax policy very much influences what policies we vote for, and what reactions we have to those policies.”

What’s your take on this news? Sound off below or on Facebook.

Karla Bowsher
Karla Bowsher
I’m a freelance journalist and former newspaper reporter who has covered both personal and public finance. I've worked for a top 50 major metro daily and a community newspaper as well as ... More

Comments

1,279 Active Deals

More Deals