Consumer Misconceptions about Tax Laws: Results from a Survey in the United States
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Consumer Misconceptions about Tax Laws: Results from a Survey in the United States Elizabeth Lyon 1 & J. R. Catlin 1 Received: 9 July 2019 / Accepted: 14 May 2020/ # Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract
A survey of 1,131 consumers in the United States identified substantial gaps in knowledge or literacy with respect to fundamental U.S. tax law concepts of withholding and tax liability, tax brackets, tax deductions versus credits, charitable contributions, income and exclusions (gifts), and payroll/self-employment tax. Rates of misunderstanding of each concept ranged from 30% to 79%. Regression analysis suggests tax literacy was higher among males and consumers who were older, more educated, and had higher household incomes. Self-reported tax knowledge was weakly correlated with objectively measured knowledge (r = .37, p < .001), suggesting respondents had limited ability to estimate their own literacy of tax concepts. Tax literacy was significantly, but relatively weakly correlated with a more general measure of financial literacy suggesting that tax literacy is a related, yet distinct component of a consumers’ overall financial proficiency. These findings have important implications for consumer welfare via potential impacts on everyday consumer decisions and public discourse. Keywords Tax law . Tax policy . Consumer knowledge . Tax literacy . Financial literacy . Survey Financial and tax matters can be complicated and confusing, yet play vital roles in the lives of modern consumers (Remund 2010). Despite recent progress assessing the prevalence and correlates of consumers’ general financial knowledge, or “financial literacy” (Klapper et al. 2016), there has been less progress when it comes to financial knowledge related to specific issues such as debt (Cwynar et al. 2019) or taxation (Chardon 2011). The latter is important not only because taxes can influence a variety of important consumer decisions (Feldman et al. 2016) but also because the limited literature that does exist suggests inaccurate consumer perceptions about specific tax law
* Elizabeth Lyon [email protected] J. R. Catlin [email protected]
1
College of Business Administration, California State University, Sacramento, 6000 J Street, Sacramento, CA 95819-6088, USA
E. Lyon, J. R. Catlin
provisions (Ballard and Gupta 2018; Brown 1969; Brown and Levin 1974; Feldman et al. 2016; Gideon 2017; Romich and Weisner 2000). Everyday decisions such as how much to work, whether to pursue a pay raise or promotion, or whether to donate to charity have tax implications and are shaped, in part, by what impact consumers perceive those tax implications will have on them personally (Brown 1969; Brown and Levin 1974; Lardeux 2018). Moreover, recent authors suggest that a better understanding of taxes would benefit people at an individual level (Chardon 2011) also lead to more rational and productive public discourse on tax policies (Kornhauser 2017; Sussman and Olivola 2011). The intense and ongoing public debate a
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