Misperceptions in the tax area influence political decisions
Tax systems around the world are extremely dynamic. Tax regulations change frequently: national tax reforms as well as initiatives at European, OECD[1] or UN level, which have an impact on national legislation, constantly give rise to new ambiguities. The effects and interactions of these national and international regulations are anything but self-explanatory. However, the acceptance of tax reforms depends largely on whether their effects are properly understood. Against this background, the question arises: How do individuals and companies actually perceive tax systems?
Researchers from the Collaborative Research Centre/Transregio TRR 266 "Accounting for Transparency" at Paderborn University, Humboldt-Universität zu Berlin and Ludwig-Maximilians-Universität München are investigating this question. They illustrate how important it is to understand how taxpayers perceive and interpret rules - and how this affects their behaviour. The tax systems of northern European countries such as Estonia, Finland and Norway, for example, are perceived as rather less complex, while Germany is considered more complex and tends to be in the middle in a global comparison.
The decisive factor is how complex citizens and companies perceive their own tax system to be. This is because studies show that the perception of high tax complexity contributes to people misjudging tax burdens: The tax burden of people with high incomes is often underestimated, while the tax burden of people with low or medium incomes is regularly overestimated. Overall, such misjudgements lead to a distorted assessment of the tax system and therefore often to particular dissatisfaction. This can also result in poor investment decisions.
Transparency can make tax systems easier to understand, but not everywhere
If a tax system is perceived as less complex, this is usually associated with greater trust in the government and tax authorities. Comprehensible and well-communicated explanations of tax rules and tax burdens as well as financial education are crucial in order to reduce erroneous conclusions, for example regarding the fairness of the tax system. "However, there is no one way to counter misconceptions. What works in northern Europe cannot simply be transferred to countries in southern Europe. Solutions that focus primarily on greater transparency only work in certain environments. It is therefore important to understand which measures can specifically reduce misjudgements and where," explains Prof. Dr. Dr. h.c. Dr. h.c. Caren Sureth-Sloane, spokesperson of TRR 266 and professor at Paderborn University. "While more information on the tax burden of individuals or companies is viewed very positively by society in some countries, people in other countries react very sceptically to such plans. Above all, they complain about the associated bureaucracy and the lack of protection for the private or entrepreneurial sphere," says Professor Sureth-Sloane.
Misperception of tax burdens affects the sense of fairness
In principle, misperceptions contribute significantly to dissatisfaction with tax systems. Studies show that the perception of injustice can also occur in countries where there is extensive redistribution via the tax system, a high level of education and strict controls on compliance with tax rules. "Our studies make it clear that people are generally not sufficiently informed about the distribution of income and wealth. In addition, they often do not know where they themselves stand in this distribution and how high their tax burden is compared to others. It is clear that financial education and differentiated information about the distribution of income and wealth are of great importance," explains Professor Sureth-Sloane.
The more complex tax systems are, the greater the risk of misjudgements and therefore also of unfounded dissatisfaction. This makes it all the more important to identify and understand such misjudgements. This applies to the taxation of both private individuals and companies: "People do not judge tax systems on the basis of objective facts, but on the basis of their subjective assessments of these facts. It is therefore crucial to minimise the risk of misjudgements, reduce complexity - for example in tax returns - and provide information about the consequences and burdens of reforms. All of this is essential in order to strengthen trust in tax systems and increase the acceptance of reforms," says Professor Sureth-Sloane.
The "Tax Complexity Index" as a guidepost
The TRR 266 team, which consists of more than 100 researchers from nine German universities and is funded by the German Research Foundation (DFG), has been compiling the Tax Complexity Index for almost 100 countries since 2016 and updates it every two years. The results provide important insights into the complexity of tax laws and tax frameworks, i.e. the associated processes.
Information on the Collaborative Research Centre can be found at: www.accounting-for-transparency.de
[1] Organisation for Economic Co-operation and Development (OECD)
