Inattention and the Taxation Bias∗

This paper studies how information frictions in tax perceptions interact with the design of actual tax policy. It develops a positive theory of tax policy in which taxpayers endogenously choose their attention to taxes and the government sets tax policy taking taxpayers’ attention choices into account. In equilibrium, we show that the government implements inefficiently high tax rates because it faces a commitment problem. This taxation bias directly depends on agents’ attention and sheds a new light on the implications of tax misperceptions. Most notably, we find that the underestimation of tax rates is not welfare-improving if taxpayers are not sufficiently attentive to tax policy. Further, we highlight that the positive correlation between income and attention reduces the progressivity of actual tax schedules. Overall, our findings suggest that by inducing information frictions, tax complexity may lead to undesirable and regressive tax increases.