The Humpty Dumpty blues: Disaggregation bias in the evaluation of tax systems

Three experiments carried out on the World Wide Web assessed the consistency of attitudes toward various tax regimes that differed in their overall levels and degrees of tax rate graduation in the presence of framing manipulations. The regimes had two components: an income and a payroll tax. One frame involved aggregation. Subjects were asked either to design a single, global tax system or to vary one component of a tax system (payroll or income tax) with the other component held constant. The idea was to replicate the effects of income tax reform given a constant payroll tax system. Consistent with the experimental hypothesis-though not with "rational" decision making subjects focused on the component they were asked to manipulate and did not respond fully to changes in the other component, across conditions, reflecting an under-adjustment bias as well as a framing effect. The results are akin to Thaler's "mental account" model for personal financial behavior. A second manipulation involved a "metric" frame: whether putative tax burdens were given in dollars or percent terms. Once again consistent with the experimental hypothesis, subjects preferred higher rates of graduation when matters were stated in percent terms. The results point to the lability of public opinion about important questions of public finance, and they illustrate a specific category of biases concerning disaggregation. (C) 2003 Elsevier Science (USA). All rights reserved.