Abstract
This paper studies how information frictions in agents’ tax perceptions affect the design of actual tax policy. Developing a positive theory of tax policy, we show that agents’ inattention interact with policymaking and induces the government to implement inefficiently high tax rates: this is the taxation bias. We quantify the magnitude of this policy distortion for the US economy. Overall, our findings suggest that existing information frictions – and thereby tax complexity – lead to undesirable, large and regressive tax increases.