Flat Versus Graduated Tax Regimes: Economics-Based vs. Psychology-Based Explanations for Individual Preferences

Abstract

This study examines preference for a method of taxation under two competing theories; standard economic theory and optimism bias. Specifically, we focus on the contradiction between the tax rate structure taxpayers claim to favor when their decision does not involve self-interest, and the tax rate structure they actually choose when the decision does involve self-interest. We find that participants favor a flat tax rate over graduated tax rates in significantly higher proportions when the choice involves self-interest as opposed to a setting without self-interest.