Do you know what the income tax burden on a gross annual salary of €10,000, €35,000, €100,000 or €500,000 is? Or what it is on your own salary? No? You are not alone. The results of a survey among more than 500 respondents in Germany show that the estimated tax burden often differs significantly from the actual figure. This shows: many people do not understand the burdens caused by the German income tax system. Consequently, both economic decision-making and political opinion formation regarding the issues of income inequality and tax fairness are often based on misperceptions. More transparency is urgently needed.
The survey was conducted among 517 people with above-average education by researchers from the Humboldt University of Berlin together with wundertax GmbH in the period 19 June – 31 July 2020. Respondents had to estimate their income tax burden as well as that of employees – unmarried, childless, no other income – with different annual gross salaries – €10,000, €35,000, €100,000 and €500,000. Respondents were asked to state both the average tax rate, i.e. the income tax in relation to the gross salary, and the marginal tax rate, i.e. the tax on additional gross salary. Further, we asked respondents to indicate the two types of tax burden on their own income.
Overestimated average tax burden
The average tax burden is, on average, overestimated by nearly 6 percentage points across all incomes: 26.28% (estimated) vs. 20.46% (actual). However, if broken down to the single income levels, the estimates vary considerably. For €10,000 and €35,000 we find a significant overestimation, while the tax burden for a gross salary of €500,000 is, on average, underestimated by 4 percentage points.
Estimated and actual average tax burden
Since in the above presented numbers overestimates and underestimates can balance each other out, we built the following three categories to identify the accuracy of estimates:
- correct estimate (deviation from the actual value is not more than 5 percentage points),
- acceptable estimate (deviation exceeds 5 percentage points but not +/- 10 percentage points)
- misperception (deviation of more than 10 percentage points)
Difficulties in estimating the marginal tax rate
Estimating the marginal tax rates, i.e. the tax burden on a €1,000 increase in gross salary, poses a significantly higher challenge for respondents than estimating the average tax rates. Approximately a quarter of the respondents specify unrealistic marginal tax rates (e.g., >100%) in at least one of the four gross wage categories. Similar to the average tax rate, the marginal tax rate is significantly overestimated for a gross salary of €10,000, while the overestimate for a gross salary of €35,000 is only modest. For the two higher salaries, the marginal tax rate is significantly underestimated.
Estimated and actual marginal tax rate
Misperception of individuals’ own tax burden
The estimates of one’s own average and marginal tax rate often suffer from misperceptions as well. In fact, for the average tax burden, almost 23% of respondents cannot provide any estimate at all, and the vast majority overestimates their own average tax burden to an even greater extent than for the given gross salaries. Similarly, when asked about the marginal tax burden on a €1,000 increase in their income nearly 28% of respondents were not able to make estimates at all. On average, those respondents who do specify a number underestimate their own marginal tax burden only slightly. However, this does not result from accurate estimates but from an offsetting of over- and underestimates. The share of misperceptions is in fact significantly higher than in the case of given gross wages.
What is an appropriate tax burden?
Against the background of these misperceptions, the question arises: What do the respondents perceive as appropriate taxation? Comparing respondents’ statements with the actual tax burden shows a mixed picture. For gross salaries of €10,000 and €35,000 respondents, on average, consider a higher tax burden to be appropriate, whereas for €100,000 and €500,000 respondents advocate for lower tax burdens. Compared to their own tax burden estimates, however, respondents favour a tax cut for all four groups.
Perception of an appropriate average tax burden
When does one belong to the top 10% and top 1% income earners?
What is the annual gross income one has to earn to belong to the top 10% and top 1% of the population with the highest incomes in Germany (top 1% / top 10%-income-threshold)? Similar to earlier questions, the given numbers were predominantly incorrect. The respondents were divided into two groups: Group A was informed about the actual top 10%-income-threshold (for a single person it amounts to a gross income of about €55,000). Group B was asked to estimate the income threshold. The threshold was highly overestimated: the median estimate is €120,000.
The top 1%-income-threshold had to be estimated by all respondents. Again, this threshold was considerably overestimated: Group A estimated €250,000, and Group B even went as high as €500,000 (median values), whereas the actual threshold is about €133,500.
The challenge of misperceptions
Our results clearly show that the income tax burden is widely misperceived. Since it can be assumed that these misperceptions lead to distorted decisions in both the economic and the political context, three questions in particular arise: 1. What are the reasons for tax misperceptions? 2: What information is needed to reduce tax misperception? 3: How should this information be prepared and through which channels should it be communicated?
Read the Executive Summary (in German) “Wahrnehmung der Einkommensteuerbelastung” by Karina Körösi, Martin Körner and Ralf Maiterth.
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