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Measuring “Schmeduling”
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Measuring “Schmeduling”

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  • Alex Rees-Jones
  • Dmitry Taubinsky

Abstract

What mental models do individuals use to approximate their tax schedule? Using incentivized forecasts of the U.S. Federal income tax schedule, we estimate the prevalence of the “schmeduling” heuristics for constructing mental representations of nonlinear incentive schemes. We find evidence of widespread reliance on the “ironing” heuristic, which linearizes the tax schedule using one’s average tax rate. In our preferred specification, 43% of the population irons. We find no evidence of reliance on the “spotlighting” heuristic, which linearizes the tax schedule using one’s marginal tax rate. We show that the presence of ironing rationalizes a number of empirical patterns in individuals’ perceptions of tax liability across the income distribution. Furthermore, while our empirical framework accommodates a rich class of other misperceptions, we find that a simple model including only ironers and correct forecasters accurately predicts average underestimation of marginal tax rates. We replicate our finding of prevalent ironing, and a lack of other systematic misperceptions, in a controlled experiment that studies real-stakes decisions across exogenously varied tax schedules. To illustrate the policy relevance of the ironing heuristic, we show that it augments the benefits of progressive taxation in a standard model of earnings choice. We quantify these benefits in a calibrated model of the U.S. tax system.

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  • Alex Rees-Jones & Dmitry Taubinsky, 2016. "Measuring “Schmeduling”," NBER Working Papers 22884, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:22884
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    Cited by:

    1. Søgaard, Jakob Egholt, 2019. "Labor supply and optimization frictions: Evidence from the Danish student labor market," Journal of Public Economics, Elsevier, vol. 173(C), pages 125-138.
    2. Christian Bruns & Mariana Lopes da Fonseca, 2023. "On Defaults, Framing, and Local Tax Policy: Quasi-Experimental Evidence from Portugal," CESifo Working Paper Series 10582, CESifo.
    3. Jakobsen, Katrine Marie & Søgaard, Jakob Egholt, 2022. "Identifying behavioral responses to tax reforms: New insights and a new approach," Journal of Public Economics, Elsevier, vol. 212(C).
    4. Preuss, Marcel & Reyes, Germán & Somerville, Jason & Wu, Joy, 2022. "Inequality of Opportunity and Income Redistribution," VfS Annual Conference 2022 (Basel): Big Data in Economics 264138, Verein für Socialpolitik / German Economic Association.
    5. Preuss, Marcel & Reyes, Germán & Somerville, Jason & Wu, Joy, 2024. "Inequality of Opportunity and Income Redistribution," IZA Discussion Papers 17155, Institute of Labor Economics (IZA).
    6. Alex Rees-Jones & Dmitry Taubinsky, 2018. "Taxing Humans: Pitfalls of the Mechanism Design Approach and Potential Resolutions," Tax Policy and the Economy, University of Chicago Press, vol. 32(1), pages 107-133.
    7. Xavier Gabaix & David Laibson, 2017. "Myopia and Discounting," NBER Working Papers 23254, National Bureau of Economic Research, Inc.
    8. Marcel Preuss & Germán Reyes & Jason Somerville & Joy Wu, 2023. "Inequality of Opportunity and Income Redistribution," CESifo Working Paper Series 10383, CESifo.
    9. Blesse, Sebastian, 2021. "Are your tax problems an opportunity not to pay taxes? Evidence from a randomized survey experiment," ZEW Discussion Papers 21-040, ZEW - Leibniz Centre for European Economic Research.
    10. Aart Gerritsen, 2016. "Optimal Nonlinear Taxation: The Dual Approach," Working Papers tax-mpg-rps-2016-02, Max Planck Institute for Tax Law and Public Finance.
    11. Dmitry Taubinsky & Alex Rees-Jones, 2018. "Attention Variation and Welfare: Theory and Evidence from a Tax Salience Experiment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 85(4), pages 2462-2496.
    12. Marcel Preuss & Germán Reyes & Jason Somerville & Joy Wu, 2023. "Inequality of Opportunity and Income Redistribution," CEDLAS, Working Papers 0309, CEDLAS, Universidad Nacional de La Plata.
    13. Blesse, Sebastian, 2023. "Do your tax problems make tax evasion seem more justifiable? Evidence from a survey experiment," European Journal of Political Economy, Elsevier, vol. 78(C).
    14. Marcel Preuss & Germán Reyes & Jason Somerville & Joy Wu, 2024. "Inequality of Opportunity and Income Redistribution," CRC TR 224 Discussion Paper Series crctr224_2024_491, University of Bonn and University of Mannheim, Germany.
    15. Phuong Ho, 2023. "Nonlinear pricing, biased consumers, and regulatory policy," Journal of Economics, Springer, vol. 138(2), pages 149-164, March.
    16. Gerritsen, Aart, 2016. "Optimal taxation when people do not maximize well-being," Journal of Public Economics, Elsevier, vol. 144(C), pages 122-139.
    17. Lu, Kelin, 2022. "Overreaction to capital taxation in saving decisions," Journal of Economic Dynamics and Control, Elsevier, vol. 144(C).
    18. Marcel Preuss & Germ'an Reyes & Jason Somerville & Joy Wu, 2022. "Inequality of Opportunity and Income Redistribution," Papers 2209.00534, arXiv.org, revised Oct 2024.

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    More about this item

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D04 - Microeconomics - - General - - - Microeconomic Policy: Formulation; Implementation; Evaluation
    • D1 - Microeconomics - - Household Behavior
    • H0 - Public Economics - - General
    • K34 - Law and Economics - - Other Substantive Areas of Law - - - Tax Law

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