How to Tax Capital Vs. Labor Income? Individual Perceptions and Preferences

Research studying income tax preferences often focuses on a broad conceptualization of income. However, individual tax preferences can vary depending on the source of income as individuals may evaluate income from different sources differently.

Differentiating between income from employment, real estate, and shares, I study perceived and preferred tax rates for incomes from such different sources using observational data from Austria. The descriptive analysis shows that individuals generally favor lower taxes on labor income and higher taxes on capital income relative to their perceived status quo. Further, there is a general consensus that income from all sources should be taxed progressively. Studying socio-economic and ideological subgroups, I find (i) across all income groups, individuals prefer higher tax rates for capital income relative to the perceived tax rates. (ii) There are, however, differences across political orientation: Left-leaning individuals favor higher taxes on capital income and lower taxes on employment income, while right-leaning individuals' preferences for capital income taxation closely align with their perception of the status quo. (iii) Beliefs in meritocracy also shape preferences, with those skeptical of meritocracy supporting higher taxes on capital income.

These findings generally support the argument that individuals evaluate income from different sources differently implying that considering this differentiation may enable us to better understand when and why and at which levels individuals want to tax incomes.