Do You Know What Your Tax Rate Is?

Do You Know What Your Tax Rate Is?


Complaining about taxes is a favorite American pastime, and the grumbling might reach its annual peak right about now, as tax day approaches. But new research from Michigan State University highlighted by the Money magazine website finds that Americans — or at least Michiganders — dramatically overstate their average tax rate.

In a survey of 978 adults in the Wolverine State, almost 220 people said they didn’t know what percentage of their income went to federal taxes. Of the people who did provide an answer, almost 85 percent overstated their actual rate, sometimes by a large margin. On average, those taxpayers said they pay 25.5 percent of their income in federal taxes. But the study’s authors estimated that their actual average tax rate was just under 14 percent.

The large number of people who didn’t want to venture a guess as to their tax rate and the even larger number who were wildly off both suggest to the researchers “that a very substantial portion of the population is uninformed or misinformed about average federal income-tax rates.”

Why don’t we know what we’re paying?

Part of the answer may be that our tax system is complicated and many of us rely on professionals or specialized software to prepare our filings. Money’s Ian Salisbury notes that taxpayers in the survey who relied on that kind of help tended to be further off in their estimates, after controlling for other factors.

Also, many people likely don’t understand the different types of taxes they pay. While the survey asked specifically about federal taxes, the tax rates people provided more closely matched their total tax rate, including federal, state, local and payroll taxes.

But our politics likely play a role here as well. People who believe that taxes on households like theirs should be lower and those who believe tax dollars are spent ineffectively tended to overstate their tax rates more.

“Since the time of Ronald Reagan, American[s] have been inundated with messages about how high taxes are,” one of the study’s authors told Salisbury. “The notion they are too high has become deeply ingrained.”