Abstract

In countries with a complex tax system, it is difficult for people to correctly assess their effective marginal tax rate, which in turn can have important consequences for labor supply. We conduct a two-wave randomized survey experiment among a large representative sample of the Dutch working-age population to assess what misperceptions people have and whether addressing those misperceptions via an information intervention affects their labor supply. Our data show that people with low income greatly overestimate their marginal tax rate, while people with high income tend to slightly underestimate it. The information intervention results in more accurate perceptions of the effective marginal tax rate two months after treatment. Paid work hours of those who initially overestimated their marginal tax rate increase by 1.5 hours per week as a result of the information treatment. The implied compensated wage elasticity of labor supply is +0.3. The effect is concentrated among those who indicate in the first wave that they face no restrictions to increase their work hours. The information intervention reduces income inequality.

Country of study

Netherlands

Research Topic(s)