Abstract
This paper explores a previously undocumented relationship between the structure of the tax system and taxpayers' perceptions of their position in the income distribution. We develop a theoretical framework that maps the information from the tax schedule onto informative signals that taxpayers use to infer their position in the income distribution. Using panel data from the General Social Survey, we find evidence that changes in the US federal income tax system have influenced perceptions of income ranks over the past few decades. We show that the correlation between actual and perceived rank in the income distribution seems to disappear for individuals in the zero-tax bracket. To establish causality, we conduct an online experiment on Amazon Mechanical Turk with American workers, where we randomly assign participants to either a proportional flat tax system or a progressive tax system with increasing marginal tax rates. Our results reveal statistically significant differences between the two tax systems in terms of participants' perceived income levels and probabilities of being above the average income level. Specifically, participants facing the progressive tax system perceive an average income level that is 12$\%$ higher and a probability of being above the average income level that is 25$\%$ lower compared to those in the control group, whereas those facing the proportional tax system show no significant differences. We run a second experiment to test whether information about social benefits and tax credits can affect income perceptions when the marginal tax rate is zero (work in progress).