Rampant tax confusion Most overstate amount they pay in income taxes

MSU Today If you're like most Americans, you see tax season as stressful - especially as the April deadline looms. But, you're not alone. About 85 percent of taxpayers overstate their actual federal income taxes, according to new research from Michigan State University. Charles Ballard, professor of economics, and Sanjay Gupta, the Eli and Edythe L. Broad Dean of the Broad College of Business, partnered on a survey and analysis to uncover the public's perceptions of the federal income tax. Ballard and Gupta took survey data from the Michigan adult population, which gave them a larger and more representative sample than prior studies. Ballard and Gupta's research, to be published in the National Tax Journal, revealed that an overwhelming majority of respondents believe they pay more in federal income taxes than they actually do. "Our research shows the depth and magnitude of the public's misunderstandings related to income taxes, as well as the astonishingly wide range of people's perceptions," Gupta said. "We estimated that the actual average federal income tax rate for this sample is about 13.9 percent, whereas they reported their tax rate to be about 25.5 percent, on average," Ballard said. "Thus, on average, the respondents to our survey thought they pay almost twice as much as they actually pay," he said. The survey data used by Ballard and Gupta came from the State of the State Survey, operated by MSU's Institute for Public Policy and Social Research since 1994. The survey included interviews with 978 Michigan residents, aged from 18 to 92. The margin of error was 3.13 percent. A closer look at the surveys allowed Ballard and Gupta to identify the factors that lead people to overstate how much they pay in income taxes. The respondents who overstated their tax rates the most included those: - who believe federal income taxes on households like theirs should be lower, - who use tax-preparation assistance, and - who believe federal tax dollars are spent ineffectively. "One possible implication of our results is that political support for tax cuts is based, at least in part, on inaccurate perceptions of the tax system," said Ballard. "Our research shows that taxpayers don't have a clear understanding of their own income taxes or our tax system, which is problematic," said Gupta. "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." The researchers call for new efforts to increase public understanding of taxes, as well as for further research on how citizens understand their taxes. "We hope that policy makers will commit public resources more strongly to civic education," they said. "We also believe that economists still have a good deal of work to do, to refine our economic models to account for people who are poorly informed." Published: Fri, Apr 06, 2018