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From today’s Economic View column:

Want to give affluent households a present worth $700 billion over the next decade? In a period of high unemployment and fiscal austerity, this idea may seem laughable. Amazingly, though, it is getting traction in Washington.

I am referring, of course, to the current debate about whether to extend all, or just some, of the tax cuts of President George W. Bush — cuts that are due to expire at year-end. They’re expiring because the only way they could be enacted initially was by pretending that they were temporary.

In this situation, it’s not clear what should be called a tax “cut.” If the temporary law is allowed to expire as planned, does that represent a return to normal, or a tax increase? Conversely, if some parts of the current rates are extended, should those count as a tax cut?

Psychologists call these descriptive choices “framing.” No one is proposing that tax rates be lower than they are now, so the question is whether some people should pay more, and, if so, who.

The rest is here.

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1) The Washington Post asked a series of economists what the appropriate tax rates for the richest Americans should be. Time magazine then asked three leading behavioral economists (Richard Thaler, David Laibson, and Dan Ariely) to read those responses and weigh in.

2) People spend more when it’s sunny. Are retailers going to start experimenting with artificial sun lamps? Hat tip: Five Minute Economist.

3) The Department of Health and Human Services releases a computer widget to help you find affordable health insurance.

4) Why is your garage, your pantry, or your office filled with stuff you never use? Overconfidence.

5) When financial executives offer a range for stock market returns with 80 percent confidence, they turn out to be right just one-third of the time.

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Economix blogs about some IRS data showing that 1.4 million people have not claimed more than $1.3 billion in 2006 tax refunds. So who would leave money on the table?The IRS says they are people who have money withheld from a paycheck but make too little to require filing a return. One possibility is they are seniors who have money withheld from their social security benefits but die that year. The IRS will send out a refund to a deceased’s spouse. But if none exists, the IRS keeps the money unless another relative claims it.

Start by plotting the raw number of refunds versus the raw number of seniors? (Yes, this is risking the ecological inference fallacy) There is a very strong relationship, even excluding California, which has the most seniors and the most unclaimed refunds. So maybe they are dead? One problem: The states with the most number of seniors–which aren’t plotted–are also the largest states (no surprise).

What about the number of unclaimed refunds per 100,000 people in a state versus the percentage of senior citizens (over age 65) living in a state. Now it’s a strongly negative relationship, even when excluding Alaska, which has very few seniors and lots of unclaimed tax returns.

So for now, who is leaving money on the table remains a mystery. Could they be frequent movers? Lower income filers? There are lots of possibilities. What are your thoughts?


1) The New Yorker interview with Richard Thaler.

2) London’s mayor wants to start a recycling bank program that gives people shopping vouchers for their recyclables.

3) Another plug this past weekend for the automatic tax return. California says it costs $2.59 to process a paper return, but only 34 cents to process its version of the automatic tax return, ReadyReturn. The makers of Turbo Tax have been trying to end the program, most recently this fall.

4) Calorie postings at Starbucks led to lower calorie consumption by six percent–except around the holidays. Hat tip: Farnam Street.

5) Will Obama mention the automatic IRA in his State of the Union speech Wednesday?

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Establishing a value added tax (VAT) in the United States is a topic of considerable debate and controversy. Such a tax, which would add a fixed percentage to every product or service, is standard in many European countries. There has been discussion about whether to add a VAT on top of existing taxes, or whether to reduce income taxes and offset the revenue losses with a VAT. Ted Gayer, Co-Director of Brooking’s Economic Studies, wonders what the behavioral implications of such a tax would be.

Traditionally, economists view the structure and application of a tax as unimportant. All that matters is the change in relative prices. But (economists Raj Chetty, Adam) Looney, and (Kory) Kroft find that structure and application do matter. For example, they find that consumers are less likely to buy an item if a sales tax is explicitly listed on the product than if the same tax is instead added at check-out.

The economists’ argument stems from a recent American Economic Review paper of a field experiment in a grocery store that varied the displayed prices of alcohol (gated copy here). The VAT raises interesting questions for policymakers who might be able to manipulate the salience of taxes in ways that would bring in more tax revenue, but potentially harm consumers. Check out the link to Brookings (Hat tip: Amol Agrawal).


Jeff Kling of Brookings slips on the cloak of a choice architect to design some innovative health care reforms. Kling makes the case for five nudges for the U.S. health care system.

  • Establishing automatic enrollment is valuable for any type of health insurance coverage expansion, regardless of whether there is an individual mandate
  • Allowing states to augment a national base of health care reforms would enable refinement of various approaches
  • Determining eligibility based on data collected through the tax system, either on tax forms or through data matching, would greatly facilitate automatic enrollment
  • Implementing collections of individual contributions to premiums through the tax withholding system may facilitate continued enrollment and reduce administrative costs
  • Creating a system in which third-parties provide enrollment advice to individuals and are rewarded for their performance may be preferable to legislating how to select a default plan

Figuring out how to simplify the sign-up process for the 47 million Americans without insurance would be one of the biggest challenges facing any new system. Like others who think there is great potential for the government to creatively use tax records, Kling says people might be required to use W4 withholding forms to pick a plan, states might make an initial rough estimate of those eligible for subsidies on the basis of last year’s tax returns, and the IRS might merge data on taxes and immigration status to better determine eligibility. Kling even has an idea for building social norms by creating special accounts for health insurance payments. Private employers providing insurance would deposit money in employees’ accounts, while those without insurance would be required to set aside money each month to pay for certain medical costs or premiums. The goal of these accounts would be to ensure that all Americans, without or without coverage, contribute to the costs of a product that ultimately benefits all of us.

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We’ve written about the potential for using social norms to decrease tax evasion. Armenia is turning to lotteries (whose attraction is explained by Prospect Theory). Given the relative weakness of the state in Armenia, compared to say, the U.S., an innovative use of lotteries might be a good option.

Armenia is offering thousands of dollars in lottery prizes to consumers who take receipts for their purchases to try to tackle rampant tax evasion in the former Soviet republic.

The initiative began on Jan. 1 and the first prizes will be awarded this month, after authorities said the threat of prosecution had failed to encourage shopowners and market sellers to install cash registers and provide receipts.

“It’s no secret that not many people give receipts in Armenia,” said Armen Alaverdyan, deputy head of the State Revenue Committee.

Hat tip: Brian Stoner

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The conventional wisdom of tax rebates has been to give them in one big chunk. It gets more money to people faster and cuts down on administrative costs. The problem is people don’t seem to spend the money. Why?

(B)ecause people don’t treat all windfalls as found money. Instead, in the words of the behavioral economist Richard Thaler, people put different windfalls in different “mental accounts,” which in turn influences what they do with the money…The key factor in these kinds of distinctions, Thaler’s work suggests, is whether people think of a windfall as wealth or as income. If they think of it as wealth, they’re more likely to save it, and if they think of it as income they’re more likely to spend it.

So what does this mean for making a rebate work? If you want people to spend the money, you don’t want to give them one big check, because that makes it more likely that they’ll think of it as an increase in their wealth and save it. Instead, you want to give them small amounts over time. And you want the rebate to show up as an increase in people’s take-home pay, because an increase in steady income is more likely to translate into an increase in spending. What can accomplish both of these goals? Reducing people’s withholding payments.

According to behavioral economics principles, the withholding, which is expected to be $500, could be handed out in small chunks, perhaps $50 at a time, rather than a single, large rebate.

That’s James Surowiecki in the New Yorker.


A couple weeks ago the Nudge blog proposed letting Americans direct a tiny portion of their tax dollars to social programs of their choosing in an effort to strengthen their connection to government. Last Sunday, Gerard O’Neill proposed letting Irish citizens decide how to spend the country’s €914 million Irish Aid budget.

In the case of Irish Aid, I see it working like this: at the start of the year each registered voter is given a voucher worth their part of the total Irish Aid budget — about €286 each, given a population of 3.2m aged over 18. Each citizen can “spend” their voucher during the year, by giving it to any one of the Irish NGOs registered with Dochas. The charities can advertise their activities in developing countries (as they already do) in order to attract voucher donations. Citizens should also be able to elect to pay their voucher directly by standing order to a charity of their choice, giving the charities some sense of continuous funding…

I would suggest that Irish charities champion my proposal — or something similar — themselves, because if they don’t, they face the possibility of experiencing the “crowding out” effect. Recent research shows that for every $1,000 that charities receive from government, private donations fall by $560. This is mainly because charities invest less effort in fundraising, and also because private donors see the state funding and figure their own donations won’t make enough difference.

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You can’t choose your tax rate, but what if you could choose a government program to fund with you tax dollars? In an (admittedly somewhat gimmicky) idea similar to the voluntary presidential campaign financing box at the top of every tax form, the government would give you the option of devoting a small amount of your taxes to a program of your choice, including financing public debt. Libertarians might not be able to find anything government does that they approve of, but even a short list of, say, 25 programs could include priorities amenable to liberals and conservatives. The purpose of the initiative would not be to fundamentally change government spending patterns. Rather, it would be to establish an means of direct participation and feeling of active decision making in government. At the end of the year, the government might produce a brief accounting of exactly what program monies were spent on.


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