taxes

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After a report that just 1 in 10 people realized they got a tax cut last year, we’re wondering how many people will notice the new payroll tax cut this year? The Boston Globe asked a few Bostonians.

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While attention has been paid to news about smoking and organ donor policies coming out of the new British government’s “Nudge unit,” there is also word out about plans to experiment with ways to boost tax compliance.

Today, Mr Letwin has also announced that the Behavioural Insight Team is working with HMRC to encourage people to pay their tax bills on time, helping to save the tax payer money and preventing the need to take tougher action. The trials will test the effects of: people’s general preference for keeping in step with their peers (most of whom will have paid their tax); reciprocity (by drawing attention to the vital services paid for by people’s tax payments); and loss aversion (taking action to avoid the increasing costs of leaving tax bills unpaid). The trials will start in February.

More details on the plans are here.

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Richard Thaler proposes reforming charitable tax deductions in his latest Economic View column.

Consider this scenario: Having decided that charitable giving is a worthy cause, the government subsidizes charitable gifts from certain households, and for those chosen to be part of the plan, every dollar donated to a charity is increased by a specified percentage. To qualify, taxpayers must have a substantial home mortgage; the subsidy rate increases with taxable income. Low-income taxpayers receive no subsidy, but donations from qualified high-income taxpayers are subsidized by as much as 40 percent — or more.

At this point, you may be wondering why I’d even mention something so preposterous. After all, why should a family’s eligibility for a donation subsidy depend on whether it has a large mortgage? And why should the government subsidize donations by the rich more than donations by the poor? The idea seems a nonstarter. And it would be, if not for one important detail: it is (approximately) the current law.

The full column is here.

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Ideas for using of lotteries to incentivize behavior are ever-expanding. In the Harvard Business Review, Steve Martin and Paul Dolan propose a lottery as a way to improve tax compliance.

Every citizen who submits their tax return and payment honestly and on time has their social security number entered in a lottery with a number (to be determined) of citizens winning a prize. What might that prize be?

How about a letter from the IRS with a check:

“Dear Taxpayer, Congratulations! You’ve won your money back.”

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The California IRS has launched a campaign alerting 46,000 households that they could have qualified for the 2009 Earned Income Tax Credit, and that it’s not too late to claim a refund. The average refund is $1,400. Hat tip to the New America Foundation, which estimates that in 2009, one in five Californians eligible for EITC refunds didn’t claim them – 800,000 people left $1.2 billion on the table.

Walking away from “free money”? According to a standard economic model that just shouldn’t happen.

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I have thought about whether the 45 percent tax rate might be so high that it is on the downward sloping part of the Laffer Curve, that is, past the point where revenues are maximized.

Arthur Laffer’s idea, that lowering taxes could increase revenues, was logically correct.  If tax rates are high enough, then people will go to such lengths to avoid them that cutting taxes can increase revenues. What he was wrong about was in thinking that income tax rates were already so high in the 1970s that cutting them would raise revenues.  George H. W. Bush famously called this Voodoo Economics.

Is it possible that lowering the estate tax rate to, say, 35 percent, could increase revenues?

Full comment at Economix.

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Richard Thaler’s latest Economic View column:

Consider three courses that Congress might take:

• Do nothing and go back to the 2001 exemption and rates.

• Make the 2009 rates and exemption permanent, an approach that the Obama administration favors.

• Make the 2010 rules permanent, thereby eliminating the estate tax, as the Republican leadership would like to do.

In thinking about these options, let’s debunk two common misconceptions.

Read more here.

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Assorted links

1) 10 percent of AOL employees at the Dulles campus work at their desks standing up.

2) A smart behaviorally informed tax cut may not be such smart politics. Fewer than one in ten people know they got a tax cut last year.

3) Unhealthy food purchases are more likely to made with credit or debit cards.

4) Cornell gets $1 million to fund the Cornell Center for Behavioral Economics in Child Nutrition Programs from the U.S. Department of Agriculture.

5) A leading Indian telecom uses opt-out ebilling. Hat tip: Amol Agrawal.

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In Queensland, Australia, an economic development committee recently released a report on speed cameras, complete with a set of recommendations for improving them. One proposal was to reward drivers who drove the speed limit with a discount on registration renewal fees for licenses. Queensland police dismissed the idea.

Acting Police Commissioner Ian Stewart today bluntly rejected the need for rewards.

“The law is the law. I expect people to obey the law at all times,” he told reporters in Brisbane.

“The people who need to be addressed are those who habitually don’t obey the law.”

Queensland Police Minister Neil Roberts was also lukewarm about the rewards suggestion. He said he thought increasing the chance of speed detection was “the greatest incentive for people to drive more carefully”.

“We will reward drivers who don’t speed by not fining them,” Mr Roberts said.

The reward discount on license fees parallels to the speed camera lottery experiment in Stockholm that enters law-abiding drivers into a lottery for a chance to win 20,000 kroner. Would Stockholm police, like their Australia counterparts, object to this idea?

Punishment and reward are two sides of the same coin – even if only one side is emphasized. The “reward” for driving the speed limit is escaping punishment. One of the lessons on the introduction of incentives is that when a financial reward is introduced into an environment where rules were previously held together by social norms and interactions, more rule-breaking can occur (this is most evident in the famous Israel day care study).

Driving behavior, like a lot of other common civic behaviors, operates under a system of punishment and no punishment, distinct from a system of punishment and reward that the Australian commission proposes. By using a financial incentive on one side, its absence on the other side stands in as an implicit reward. But the police objections still seem to distinguish the two: A social reward, or at least a social obligation, for driving the limit, and a financial punishment for exceeding it. It’s an open question whether Stockholm drivers display this kind of mental compartmentalization?

While the police see the introduction of the reward as a likely culprit in the demise of social norms, another hypothesis is that the speed cameras themselves are under suspicion. One area of civic behavior that displays similarities to safe driving is tax compliance. There is no reward for paying your taxes, only a punishment for not paying them. While the deterrence model of tax compliance argues that people fear the threat of an audit, the actual investigation rate is quite low. Why so many people pay taxes has been a puzzle to behavioral economists. A behavioral explanation rests on compliance as a mutual agreement between citizen and state that the taxes levied are collected fairly and legitimately. As more tax information today is automatically reported to the government through W-2 forms and third-party financial transaction data, the threat of an audit (even if the actual rate is still low) looms more powerfully because identifying tax fraud is so much easier.

Whether the increase in risk aversion is enough to explain tax compliance rates is a debate that behavioral economists and deterrence economists can argue over. More intriguing is the possibility that information disclosure weakens the social psychological contract even as it improves the efficiency of tax collection. In the old days, speeding, like taxes, was mostly on the honor system. As technology allows law enforcement to catch speeders more effectively, the sense of duty and safety that keeps drivers compliant may weaken too, turning the entire relationship from an unwritten code of honor to a more conventional legal-style contract of reward/punishment for action. If so, a few extra material goodies aren’t such a terrible idea.

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1) Richard Thaler on the mental accounting behind a devilish rebate card.

2) Dan Goldstein on the taxonomy of defaults.

3) It takes an average of 66 days to form an (easy) everyday habit.

4) The New Yorker reviews procrastination. A book about it, anyway.

5) Does prospect theory kill the taxpayer receipt idea?

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