Understanding Tax Policy: How do People Reason?

Abstract I study how people understand, reason, and learn about two major tax policies: income taxation and estate taxation. Using large-scale social economics surveys issued to representative U.S. samples and associated experiments, I elicit respondents’ factual knowledge about tax policy and the income or wealth distributions. Most important, I study their understanding of the mechanisms of tax policy and the reasoning that underlies their policy views. In decomposing policy views, I find that support for income and estate taxes is most strongly correlated with social preferences, that is, the perceived benefits of redistribution and concerns around the fairness of inequality and taxation, as well as with broader views of the government. Efficiency concerns play a more minor role. These correlational patterns are confirmed by the experimental approach, which shows people instructional videos that explain the workings and consequences of one of the aspects of tax policy (the Redistribution and the Efficiency treatments) or that bring the two together and focus on the trade-off (the Economist treatment). The Redistribution and Economist treatments significantly increase support for more progressive income or estate taxes, while the Efficiency treatment has no effect. There are large partisan gaps in both the final policy views and at every step of the reasoning about the underlying mechanisms of taxes. Democrats’ and Republicans’ divergences in tax policy views can ultimately be traced back to different normative criteria (social preferences) and views of the government, rather than to different perceptions of the efficiency implications of taxation.