Ralf Maiterth, Professor for Business Taxation at Humboldt University of Berlin, is principal investigator of the TRR 266 project B08 “Tax Burden Transparency”. Along with Caren Sureth-Sloane, he investigates how transparent the tax burden is for individuals, firms, regulators, and politicians. And he examines how (lack of) tax burden transparency affects decision making.
Taxation: vigorous and multi-layered
A fascination for tax research revealed itself very early in my studies. Love at first sight – if you can call it that. The field is incredibly dynamic and multi-layered – and it affects all kinds of institutions and people. I find that exciting. It is real fun to examine the operating principles and effects of taxes, because tax systems are complex and the effects of taxes are anything but obvious. You always come across something new and unexpected. This regularly gives rise to exciting new research questions. And it creates opportunities to correct common misperceptions on tax burdens or to point out why solutions and approaches that seem promising at first glance do not work in the end. Ultimately, this also strengthens my own awareness of how important it is not to take anything for granted and to keep asking questions. This is a message I also like to pass on to my students.
The tax system itself is very dynamic and constantly generates new input.
Between efficiency and fairness
The tax system itself is very dynamic and constantly generates new input. This is achieved through new regulations and tax reforms – but also through the trade-off between efficiency and fairness. On grounds of efficiency, for example, the personal income tax rate should be proportional. In other words: one (flat) tax rate should apply to all income classes. On grounds of fairness, on the other hand, there are good arguments in favor of a progressive income tax, meaning a higher tax rate on higher incomes. It’s about finding the right balance. What excites me is that there is not this one right solution as with mathematics. The right balance depends on many factors – and on the perspective from which you look at it. It is also subject to the zeitgeist. Thirty years ago, the government was seen by many economists as a leviathan who wants to take too much away from its citizens. The international tax competition which had gained momentum was euphorically welcomed at the time. Today, the focus is far much more on distributive justice. Among economists, there are currently many advocates in favor of a wealth tax. 30 years ago, this would have been inconceivable.
In the Collaborative Research Center, we deliberately address issues that affect real-life to provide important insights for policy and practice.
Making a difference
I want my research to make a difference. Not only in terms of scientific outreach but also for firms, for the people, and especially for tax policy. My own aspiration is highly consistent with the claim of the TRR 266. I appreciate that very much. In the Collaborative Research Center, we deliberately address issues that affect real-life to provide important insights for policy and practice. In addition to publications in top-tier scientific journals, we therefore also choose formats that make our research accessible and comprehensible to a broader public – such as blog posts or interactive graphics. With our open science initiative, we want to make our research transparent – and help ensure that everyone can participate, collaborate and contribute. I really value innovative approaches like that. To accomplish all this as a single person is impossible indeed. It takes like-minded people to create some momentum and make a difference in the long term. And this is exactly what the TRR 266 can do.
In our project B08, we want to find out to what extent firm owners and managers misperceive firms’ tax burdens.
Tax misperceptions and its drivers
In the TRR 266, I also have the opportunity to collaborate with high-level researchers from all over Germany and Europe – from different areas of accounting and with different research focuses. This way, I can address certain research questions that I could not handle solitarily. For our project B08, for example, the German Business Panel is particularly important. It will provide us with corporate data – and thus offer a unique database for empirical business research. As such, it also provides the perfect base for our research in the area of corporate tax misperception. In our project B08, we want to find out to what extent firm owners and managers misperceive firms’ tax burdens. We are also interested in misperceptions of individuals, regulators, lobbyists, and politicians. We want to examine how pronounced these misperceptions are and we want to identify their drivers. For example: Does it matter how old a person is, how high their income is or what political views they hold? We hope to be able to derive how taxpayers need to be informed in order to develop a sense for the actual tax burden – their own and the tax burden of others.
Which effects actually result from tax misperceptions will be examined within our project B08 in more detail.
Effects of tax misperceptions
It is important to us to make people aware of tax misperception. After all, it can distort decisions and induce tax effects that were not intended. If, for example, I wrongly assume that top income earners pay too little tax, I am more likely to vote for a party that focuses on redistribution even though other content of the party program might not appeal to me at all. In turn, firms that underestimate their tax burden compared to foreign competitors may come up with the idea of reducing their tax burden by increasingly raising debt. This is because debt is more efficient than equity capital from a tax perspective. But with a lower equity base, the firm is much more vulnerable in times of crisis. Which effects actually result from tax misperceptions will be examined within our project B08 in more detail.
The results of one of our surveys indicate that the respondents have problems to understand the progressivity of the German income tax.
Progressive taxes: to understand or not to understand
We have already been able to draw some exciting insights from our research – for example, on misperception of income tax progressivity. The results of one of our surveys indicate that the respondents have problems to understand the progressivity of the German income tax. When respondents have to indicate the income tax burden for different gross salaries (€10,000, €35,000, €100,000 and €500,000), they realize that income tax is progressive. However, they underestimate by far the extent of progressivity by overestimating the tax burden on low incomes and underestimating the tax burden on high incomes.
If one asks for aggregate values, on the other hand, it becomes apparent that the respondents do not understand what progressive taxation means. While the share of the top 10% income earners in total income earned in Germany is still accurately estimated, the share of this group in income tax revenue is dramatically underestimated. The latter is about 57%. Compared with their 38% share of income, it shows that income tax is highly progressive. In contrast, respondents estimate the share of top 10% income earners in income tax revenue to be only 34%. This demonstrates respondents do not understand that we have a progressive income tax. In contrast, they even assume a regressive tax, where top income earners face lower tax rates than low income earners.
We plan to conduct a major survey on inheritance tax as well as a survey in the ministries of finance.
Uncovering data treasures
We are currently preparing a presentation on these survey results, which we will hold on 29 April at the virtual TRR 266 Mini Conference „Taxation: Transparency, Complexity, Misperception, and Real Effects“. We also plan to conduct follow-up surveys to identify the drivers of these serious misperceptions and the extent to which information reduces misperception. In these follow-up surveys, we will additionally ask people, for example, about their political party affiliation and their ideas of fairness. The results of other surveys still offer a treasure filled with data that we need to evaluate. For instance, we are currently analyzing a survey – on marginal tax burdens – we completed recently. Other surveys are still being developed. We plan to conduct a major survey on inheritance tax as well as a survey in the ministries of finance, which aims to find out whether people who work in fiscal policy also suffer from misperception.
The article reflects the opinion of the researcher and not necessarily the views of the TRR 266. As a scientific association, the TRR 266 is committed to both freedom of speech and political neutrality.