Taxes are an important factor when it comes to financial decisions, such as investments, savings and financing. This applies to decisions made by private individuals as well as to decisions made in companies. It is therefore important that individuals making such decisions are aware of the actual tax burden, as misperceptions can lead to incorrect decisions and undesirable tax planning activities. A comprehensive literature review by the researcher team shows that the actual tax burden is mostly misperceived and consequently affects decision-making. The team subsequently developed a Behavioral Taxpayer Response Model to explain determinants of tax misperception and effects on the decision-making behavior.
Contrary to the prevailing assumption in most studies that decision-makers are aware of actual tax burdens, tax misperceptions are common at the individual as well as corporate level. For example, less than half, and according to some studies as few as 10%, of individual taxpayers can report their own income tax burden or that of other income levels correctly. Even managers of listed corporations sometimes make their decisions on the foundation of incorrect tax rates, for example when they use average tax rates instead of marginal tax rates.
Effects of Tax Misperception on Decision-Making
Tax misperception generally results from both a lack of tax knowledge as well as an inadequate processing of tax information when making decisions. When examining individual taxpayers, it becomes evident that they often misinterpret the information about tax rates available to them and the tax treatment of an issue. This is particularly true when tax complexity is high and tax salience is low. Lack of tax knowledge or insufficient processing of the available information on tax law result in a subjective perception of the (expected) tax burden, which often differs significantly from the objective tax burden and can therefore lead to a distorted decision.
Studies examining the effect of tax misperceptions at the corporate level are rare, but come to similar conclusions. They demonstrate that even professionals suffer from tax misperception which leads them to making inefficient investment and financing decisions.
Management of Tax Perception and its Impact on Stakeholders
The literature we analyzed also suggests that companies deliberately try to influence the perception of corporate tax burdens, for example by investors or the public. Studies provide evidence that they do so by either reporting negative tax information less frequently or less visibly. However, evidence also shows that they voluntarily provide specific tax information even in the absence of a reporting requirement in order to mitigate negative capital market reactions in the case of missing tax information. Furthermore, there is evidence that larger companies in particular report higher tax burdens in order to influence the political process.
Determinants of Tax Misperceptions: Behavioral Taxpayer Response Model
To better analyze individual and corporate tax misperception, we developed the Behavioral Taxpayer Response Model. It shows that tax misperception is influenced by specific individual traits (e.g. education, tax knowledge and attitude towards taxes), tax information characteristics (such as tax complexity and tax salience), and determinants of the decision environment (e.g. competition and time pressure). In addition, the availability and use of unbiased tax advice (e.g. by tax consultants, employer or tax agency services) impacts whether tax misperceptions result into decision errors or not.
Impact and Next Steps
Our Behavioral Taxpayer Response Model can help to better evaluate how tax misperception arises and how it affects decision-making. The model thus helps to identify starting points for avoiding undesirable tax distortions. Not only do the results provide orientation for tax policy makers, but also offer a foundation for the development of a comprehensive research program for a deeper understanding of tax misperceptions and their effects on decision-making, especially in the corporate sector. This applies to companies of different legal forms, sizes and industries as well as to misperceptions among corporate managers with different responsibilities and profiles as well as among tax advisors and other intermediaries. Future research on misperceptions and their consequences should increasingly focus on large companies with professional tax management, as there are only few contributions in this area so far and the research gap is therefore particularly large.
Read the full paper “Tax Misperception and Its Effects on Decision Making – Literature Review and Behavioral Taxpayer Response Model” by Kay Blaufus, Malte Chirvi, Hans-Peter Huber, Ralf Maiterth and Caren Sureth-Sloane in the European Accounting Review.