TAX ILLUSION AND LABOR SUPPLY OF MARRIED-WOMEN - EVIDENCE FROM GERMAN DATA

In the face of complex budget constraints the assumption that individuals act on the basis of complete knowledge of the tax system is a theoretical borderline. The specific issues examined in this empirical study are (i) to what extent do consumers (here married women) perceive their true marginal tax rate when they make their labour supply decisions, and (ii) how does the perception of the marginal tax rate differ among various socioeconomic groups? Using German panel data we find that, against conventional wisdom, the assumption of complete knowledge of the tax system does not fit the data well, and that education appears to be the main determinant of a correct perception of the marginal tax rate.