On Tax Burden Perception of Wage and Salary Income and Its Influencing Factors in China: A Case Study of Employees with Formal Labor Contracts

【Authors】

LI Wen

【WorkUnit】

Shandong University, 250100.

【Abstract】

Tax policy is an important regulatory tool used by governments to influence the behavior of individuals by adjusting the tax burden. A fundamental prerequisite for achieving the regulatory objectives of tax policy is that taxpayers can accurately perceive their tax burden; otherwise, the effectiveness of tax policy may be distorted. Numerous studies from various countries have shown that a significant proportion of individual income taxpayers misperceive their tax burden. However, existing literature varies in estimates of the proportion of taxpayers experiencing perception bias and in the specific tendencies of such bias. Additionally, there is no consensus on the factors influencing tax burden perception bias. In China, research on tax burden perception bias related to individual income tax remains limited. This paper aims to fill this gap by examining the wage and salary income tax burden perception in China and its influencing factors.
First, this study utilizes micro-level household survey data from China, focusing on employees with formal labor contracts as the sample. It calculates the actual tax burden of wage and salary income for the sample and measures their perception bias. Additionally, the extent of tax burden ignorance is also assessed. Second, drawing on behavioral economics and social psychology theories, the study analyzes the mechanisms and factors driving individual income tax perception bias. It argues that accurately understanding the tax burden imposes significant cognitive costs on individuals with bounded rationality. As a result, individuals may abandon rational judgment in favor of intuitive, albeit irrational decision-making, leading to cognitive bias.
The study finds that a significant proportion of the sample exhibits tax burden ignorance and perception bias. Tax burden ignorance accounts for 26.78% of the total sample, with variation based on income, education level, age, and gender. In terms of perception bias, nearly half of the sample misjudges their average tax rate, with underestimators significantly outnumbering overestimators. The overall bias trend indicates a slight underestimation of the tax burden, with relatively few cases of extreme deviations. Various factors influence an individual’s tax burden perception bias. Higher after-tax income significantly raises both underestimation and overestimation tendencies, while aging has the opposite effect. Women are less likely than men to underestimate or overestimate their tax burden. Higher education levels, greater subjective well-being, satisfaction with public services, and awareness of public service fairness all significantly reinforce the tendency to underestimate the tax burden. Conversely, a higher paid-in ratio of social insurance and housing provident fund, as well as greater self-reported attention to financial information, significantly increases the tendency to overestimate tax burden. Marital status and willingness to supervise the government had no significant impact on tax burden overestimation or underestimation. Additionally, higher education levels mitigate the overestimation and underestimation tendencies induced by rising after-tax income. Furthermore, the influencing factors of tax burden perception bias differ between high-income and low-income groups, as well as between men and women.
The findings indicate that tax burden ignorance and perception bias regarding individual income tax is widespread among China’s wage-earning population. This situation significantly affects taxpayers’ understanding of tax policies, potentially leading to deviations between actual policy outcomes and intended objectives. Therefore, policymakers should consider taxpayers’ perception of their tax burden when formulating tax policies.

【KeyWords】

Personal Income Tax, Perception of Tax Burden, Bounded Rationality, Heuristic