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Abstract: Public finance is one of the oldest sub-fields in economics and social science, behavioral economics among the youngest. While the field of behavioral finance has received much attention, behavioral public finance has received far less. Yet the absence of any simple arbitrage mechanism in the public sphere, such as markets and competition in private domains, suggests that the effects of deviations from rationality may pervade public finance. This article surveys the potential new field of behavioral public finance and notes three broad areas for further inquiry and development: (1) the role of form and framing in the design of public finance mechanisms, (2) the significance of time inconsistency and problems of self-control in employing welfarist models of public policy and (3) alternative models of taxpayer compliance. The three areas illustrate, however tentatively, the need for researchers and policy-makers to use realistic assumptions of human judgment and decision-making in considering important questions in public finance.
Abstract: Behavioral economics and cognitive psychology have demonstrated that people deviate from ideal precepts of rationality in many settings, showing inconsistent judgment in the face of framing and other formal manipulations of the presentation of problems. This article summarizes the finding of original experiments about subjects' perceptions of aspects of tax-law design and argues for the relevance of behavioral perspectives to the understanding and improvement of real-world fiscal systems. We show that in evaluating tax systems, subjects are vulnerable to a wide range of heuristics and biases, leading to inconsistent judgment and evaluation. The prevalence of these biases suggests that there is room for skillful politicians to manipulate public opinion, and that tax-system design can be volatile on account of the possibility of eliciting preference reversals through purely formal rhetorical means. More troubling, the findings suggest a likely and persistent wedge between observed and optimal public finance systems.
Abstract: The principal findings of behavioral economics and cognitive psychology over the past several decades have been to show that human beings deviate from ideal precepts of rationality in many settings, showing inconsistent judgment in the face of framing and other formal manipulations of the presentation of problems. This paper summarizes the findings of original experiments about subjects' perceptions of various aspects of tax-law design. We show that in evaluating tax systems, subjects are vulnerable to a wide range of heuristics and biases, leading to inconsistent judgment and evaluation. The prevalence of these biases suggests that there is room for skillful politicians or facile political systems to manipulate public opinion, and that tax system design will reflect a certain volatility on account of the possibility of eliciting preference reversals through purely formal rhetorical means. More troubling, the findings suggest the possibility of a persistent wedge between observed and optimal public finance systems.
Abstract: Three studies of attitudes toward tax policies were conducted on the World Wide Web. The results show several effects. In penalty aversion, subjects preferred bonuses over penalties, when policies differ only in how they are formally described. In the Schelling effect, subjects prefer both higher bonuses (for children) for the poor than for the rich and higher penalties (for being childless) for the rich than for the poor. In the neutrality bias, subjects preferred separate filing for married couples more when it was presented in a format that emphasized the effect of marriage (where it is neutral) than in one that emphasized the effect of the number of earners in a couple (where one-earner couples pay more). In the status-quo effect, subjects preferred the specified starting point to any change. Finally, in the metric effect, subjects favored more progressiveness in tax burdens when taxes were expressed in percent than when they were expressed in dollars. The research suggests a general framework. Subjects approach a given decision problem with strong independent norms or ideals, such as, here, "do no harm," "avoid penalties," "treat likes alike," "help children," and "expect the rich to pay more." They then evaluate the problem on the basis of the most salient norms. In a complex area such as tax, independently attractive ideals are often in conflict, and the result is shifting, inconsistent preferences.
Abstract: The traditional understanding of broad-based tax systems contrasts an income tax with all forms of a consumption tax. The income tax, alone, includes the yield to capital in its base; consumption taxes do not. Simple financial analysis demonstrates the equivalence of the two most common classes of consumption taxation - prepaid, or wage-based, and postpaid, or sales taxes - under certain assumptions, most importantly including constant tax and interest rates between the periods in the model. Advocates of redistributive taxes insist on both progressive rates and an income base, in large part to tax the yield to capital; opponents clamor for flat-rate consumption taxes, often invoking Mill's celebrated argument against the income tax's "double taxation" of savings to support their case. Once progressivity is presumed, however - as its enduring popular appeal suggests it ought be - the traditional understanding is flawed. Asking a different timing question, "when, in a taxpayer's flow of funds, ought progressive taxes be imposed?," casts tax systems in a new light. The present tax system emerges as an onerous wage-based one. A progressive cash-flow consumption tax, in contrast, emerges as the best - most consistent and principled - tax on the yield to capital, under just the conditions in which it is fair and appropriate to tax such yield. This gives a further reason to support a progressive cash-flow consumption tax, sounding in reasons familiar to income tax supporters. A consistent, progressive cash-flow consumption tax will lower the burden of taxation when capital transactions (borrowing, saving, and investing) are used to smooth labor earnings within or between lifetimes (or taxpayers), and will increase the burden of taxation when capital transactions are used to enhance labor earnings within or between lifetimes (or taxpayers). Critical reflection based on a near century of experience reveals such a tax to give form to attractive normative ideals. The new understanding helps to show that the traditional and most common arguments for consumption taxation are not compelling. The best, most appealing case for a consumption tax does not rest on "horizontal equity" models, nor on claims about the economic, consequentialist importance of savings on an individual or an aggregate social level. Rather it is claims of fairness, in a social contractarian sense in the manner of John Rawls and other liberal theorists, that argue for a properly designed consumption tax - in part precisely because of the way such a tax sometimes but not always burdens capital and its yield, and in greater part because such a tax points the way towards greater, more meaningful progressivity in tax. The new understanding of tax yields important insights into pressingly practical matters of tax policy and design, and opens up an important window to critique contemporary trends in tax reform. The battle in tax policy should not be over income versus consumption taxation - as it has been for centuries - but rather over what kind of consumption tax to choose. Failure to address this question head-on has led tax policy to move, seemingly inexorably, towards the wrong choice, with the fate of progressive, redistributive taxation hanging in the balance.
Abstract: Welfare economics suggests that the tax system is the appropriate place to effect redistribution from those with more command over material resources to those with less - that is, in short, to serve "equity." Society should set other mechanisms of private and public law, including public finance systems, to maximize welfare - that is, in short, to serve "efficiency." The populace, however, may not always accept first-best policies. Perspectives from cognitive psychology suggest that ordinary citizens can react to the purely formal means by which social policies are implemented, and thus may reject welfare-improving reforms. This Article sets out the general background of the problem. We present the results of original experiments that confirm that the means of implementing redistribution affect its acceptability. Effects range from such seemingly trivial matters as whether or not tax burdens are discussed in dollars or in percent terms, to more substantial matters such as how many different individual taxes there are, whether the burden of taxes is transparent or not, and the nature and level of the public provision of goods and services. The findings suggest a deep and problematic tension between the goals of equity and efficiency in public finance.
Abstract: The traditional understanding of broad-based tax systems contrasts an income tax with all forms of a consumption tax. The income tax, alone, includes the yield to capital in its base; consumption taxes do not. Simple financial analysis demonstrates the equivalence of the two most common classes of consumption taxation - prepaid, or wage-based, and postpaid, or sales taxes - under certain assumptions, most importantly including constant tax and interest rates between the periods in the model. Advocates of redistributive taxes insist on both progressive rates and an income base, in large part to tax the yield to capital; opponents clamor for flat-rate consumption taxes, often invoking Mill's celebrated argument against the income tax's double taxation of savings to support their case. Once progressivity is presumed, however - as its enduring popular appeal suggests it ought be - the traditional understanding is flawed. Asking a different timing question, when, in a taxpayer's flow of funds, ought progressive taxes be imposed?, casts tax systems in a new light. The present tax system emerges as an onerous wage-based one. A progressive cash-flow consumption tax, in contrast, emerges as the best - most consistent and principled - tax on the yield to capital, under just the conditions in which it is fair and appropriate to tax such yield. This gives a further reason to support a progressive cash-flow consumption tax, sounding in reasons familiar to income tax supporters. A consistent progressive cash-flow consumption tax will lower the burden of taxation when capital transactions (borrowing, saving, and investing) are used to smooth labor earnings within or between lifetimes (or taxpayers), and will increase the burden of taxation when capital transactions are used to enhance labor earnings within or between lifetimes (or taxpayers). Critical reflection based on a near century of experience reveals such a tax to give form to attractive normative ideals. The new understanding helps to show that the traditional and most common arguments for consumption taxation are not compelling. The best, most appealing case for a consumption tax does not rest on simple horizontal equity models, nor on claims about the economic, consequentialist importance of savings on an individual or an aggregate social level. Rather it is claims of fairness, in a social contractarian sense in the manner of John Rawls and other liberal theorists, that argue for a properly designed consumption tax - in part precisely because of the way such a tax sometimes but not all the times burdens capital and its yield, and in greater part because such a tax points the way towards greater, more meaningful progressivity in tax. The new understanding of tax yields important insights into pressingly practical matters of tax policy and design, and opens up an important window to critique contemporary trends in tax reform. The battle in tax policy should not be over income versus consumption taxation - as it has been for centuries - but rather over what kind of consumption tax to choose. Failure to address this question head-on has led tax policy to move, seemingly inexorably, towards the wrong choice, with the fate of progressive, redistributive taxation hanging in the balance.
Abstract: The task is to give an overview of what I hope to be an emerging field of behavioral public finance. Behavioral finance, as per Barberis and Thaler 2003 (and others), consists of two parts: (1) individual level heuristics and biases, which can lead to sub-optimal (inconsistent) judgment and decision-making, and (2) institutional arbitrage mechanisms. In private finance and economics, these latter, most importantly competition and markets, act to reduce and perhaps eliminate the harms from the former. Hence we get the relatively modest policy recommendations characteristic of Sunstien and Thaler's Nudge (among many other examples), such as for default rules that set participation in 401(k) plans. In public finance, in contrast - and arguably in all sectors of the economy where there are not flourishing markets (such as among the poor?) - there are no obvious arbitrage mechanisms. Politicians and the political processes can even exacerbate persistent cognitive error: consider the predilection for hidden taxes, such as the corporate tax. Behavioral public finance is a hugely important subject matter. These slides, summarizing original research done with Jon Baron of Penn (see the survey piece, McCaffery and Baron 2006), explain the general setting; group together many biases under a common isolation effect, and then use Kaplow and Shavell 2002's model of optimal legal system design, tracking the two welfare theorems - i.e., set rules (including, we argue, public finance rules), so as to maximize wealth or serve efficiency, and then redistribute from the greater social pie via the tax system - to suggest the possible problems for a democracy. These include: (a), leaving wealth on the table, because the optimally psychologically pleasing policy is not the most efficient one; (b) pitting equity or redistribution against efficiency, unnecessarily, because support for redistribution depends on the purely formal aspects of public finance; and (c) allowing skillful politicians to affect preference reversals among the citizenry, by agenda setting and framing, as by getting citizens averse to deficits and in favor of government expenditures to cut taxes, today, by isolating tax cuts from spending programs.
Abstract: The strategy of "starving the beast" involves cutting taxes today with the expectation that spending cuts will follow tomorrow. Various heuristics and biases help to explain the likely effects of the strategy. In four experiments conducted on the World Wide Web, subjects chose general levels of taxation and public spending from differing hypothetical starting points. In general, subjects wanted to reduce both taxes and spending, preferring balanced budgets and even surpluses to deficits. When asked about specific spending cuts, subjects showed a reluctance to make cuts, leading to large and persistent deficits. "Starving the beast," by pairing specific tax cuts with the general, abstract idea of spending cuts, can thus succeed in a population preferring fiscal balance. Once the deficit is created, it will likely persist, influencing future policy preferences, due to an anchor and underadjustment bias. Left indeterminate is what happens in any subsequent period of deficits, when a balanced budget constraint is imposed: in such cases, loss aversion vis a vis tax increases is pitted against loss aversion vis a vis spending decreases. Our experiments suggest a role for framing in making policy choices under these conditions.
taxation, budget deficits, heuristics and biases
Abstract: The most common use of the insights of behavioral economics in the cause of fundamental tax reform has been to argue for the employment of ad hoc tax-favored savings vehicles - such as individual retirement accounts (IRAs), medical, and educational savings accounts, and so on - within an income-tax framework. There is no reason under a rational life-cycle model of individual savings behavior why these ad hoc vehicles should work, to increase savings on the micro (individual) or macro (collective social) levels, whether they follow the postpaid approach of traditional IRAs or the prepaid approach of Roth IRAs. Prepaid accounts generate a windfall gain to existing savers, and offer no cash-flow relief for current non-savers to help them save. Postpaid accounts can be easily arbitraged by borrowing, or dissaving. Proponents of these plans thus point to lessons from behavioral economics, arguing that myopic individuals who use mental accounts might be led to save by the special vehicles. This essay takes exception to this standard view. It argues that this view of matters misconceives basic principles of behavioral economics, using ad hoc findings in an ad hoc fashion to justify ad hoc, incremental reform. Best understood, behavioral economics suggests that ad hoc tax favored plans will not work. This counter-theory is supported by the data, which show, broadly, decades of ad hoc tax-favored vehicles within the Internal Revenue Code, with more apparently on the way, matched by convincing evidence of little or no savings by most Americans, and little savings in the aggregate. The essay concludes by suggesting that a happier, more stable marriage of behavioral economics and fundamental tax reform suggests fundamental, not incremental, reform of the tax system.
Abstract: Virtually all liberal egalitarian advocates of redistributive taxation support an income tax, believing that consumption taxes fail to reach capital and its yield. But this is not true under progressive rates. There are two forms of consumption tax, prepaid and postpaid. A consistent progressive postpaid consumption tax reaches the yield to capital in just those cases in which ordinary moral intuitions want it to be reached: when savings are used to finance a better, more expensive, lifestyle. Such a tax stands between an income tax, which double taxes all savings, come what may, and a prepaid consumption tax, which never taxes savings. It is the last, best hope for some semblance of redistribution via tax on earth.
taxation, fair not flat, tax reform
Abstract: Traditional tax policy has been locked in a seemingly all-or-nothing debate between two apparent extremes, income and consumption taxation. But there are three choices of a comprehensive tax system, not two. This is because, under progressive rates, the two canonical types of consumption tax (prepaid and postpaid) are not equivalent, as the traditional view of tax would have them be. Adding in a distinct third view of tax makes clear that the best system for effecting liberal redistribution is not an income tax at all but a specific form of a consumption tax, a consistent progressive postpaid one. And this is, in large part, because such a consumption tax best gets at the yield to capital, in just the way ordinary moral intuitions want to get at it.
Abstract: Research has shown that people vary widely in their support or opposition to progressive taxation. We argue here that the perception of progressiveness itself is affected by the nature of the tax system and by the way it is framed, or presented. Experiments conducted over the World-Wide Web and using within-subject design demonstrate that subjects suffer from a range of heuristics and biases in understanding and supporting progressive or redistributive taxation. After reviewing some prior results, we report four new studies. Two of them indicate that people do not sufficiently appreciate the reduction of progressiveness that results from the use of tax deductions to partly reimburse private expenditures. The other two indicate that people do not fully appreciate the reduction in progressiveness that results from cuts in government services.
Abstract: Ever since Mancur Olson's 1965 classic The Logic of Collective Action was published, the dominant view of politics in the academy and the popular understanding has featured the special interest model. Small groups with high stakes in legislative outcomes solve their coordination and free-rider problems and then descend on Washington and other bastions of power, seeking rents. In this model, the special interests are the predators, the legislators the prey. In this paper, we argue that in an important set of cases, the process works in reverse. Legislators pro-actively solve the coordination and free riding problems identified by Olson so that they can then shake down the groups so formed for campaign contributions. We illustrate this model of a reverse Mancur Olson phenomenon with the extended example of estate tax repeal/non repeal, and suggest further extensions. The key properties of the phenomenon are small groups with high stakes that Congress has helped to frame or set up; plausible action; two or more sides; plausible longevity for any legislative action. The key predictions are that, once Congress has found rich territory for the game, it will string matters along, frequently voting, never really acting, and avoiding sensible compromises at every turn.
Abstract: This Article explains, updates and generalizes Cooper (1979), which had labeled the estate tax a voluntary tax. The tax has remained "voluntary" in the sense of being easily avoidable, even by those engaging in activities within the tax's ostensible normative target (i.e., significant intergenerational wealth transfers). Further, all taxes on the yield to capital are voluntary in this sense. The federal tax system, writ large, is increasingly a wage-based tax. Citizens who own large stores of capital can live - and die - tax-free using common tax planning techniques. These facts ought to call the normative justification for the status quo, including the estate tax, into question. A consistent progressive cash flow tax - without a separate estate tax - is a far better, more consistent tax on both the yield to capital and inheritance than is the present, highly flawed, income plus estate tax.
Abstract: This article aims to expand research about perceptions of discrimination both substantively and methodologically: beyond the domains of race and ethnicity, and relying partly on Web-based surveys. Methods. Parallel surveys were conducted over the telephone and the World-Wide Web, using standard random-digit dial (RDD) techniques for the former, and a large volunteer panel for the latter. Results. Both modes, phone and Web, revealed that respondents consider discrimination based on physical appearance and economic status to be more prevalent than discrimination based on ethnicity. Respondents also reported that they themselves have been victimized more by physical appearance and economic status discrimination than by ethnic discrimination. Significant differences emerged between the phone and Web respondent pools, even after controlling for such independent variables as age, race, education level, and gender. The findings suggest that people are more willing to reveal knowledge about controversial social phenomena on the Web than on the phone. World-Wide Web, internet, phone survey, knowledge falsification, social desirability bias, selection bias
Discrimination, ethnicity, physical appearance, beauty, economic inequality, public opinion, mode effect,
Abstract: The dominant conception of ownership in Anglo-American law ever since Blackstone, at least, has been the fee simple absolute. Among the incidents of ownership in this absolute conception is the jus abutendi or right to waste. A life estate conception of property would abrogate this right to waste while preserving the attractive features of the fee simple absolute, including in particular alienability and freedom of testamentary disposition. This article argues that liberal society has always disapproved of waste, in each of two senses -- dissipatory use or destruction and non-urgent use. The evolution of forms of ownership towards an absolute model was in fact motivated in part by a desire to curtail waste in its dissipatory sense. As value has moved away from land and into intangible repositories, paradigmatically money, the problem of non-urgent waste has become more pressing. Whereas prior scholars have not been able to conceive of a practical general law against waste, the tax system can bring about just this result, through a progressive consumption tax. Such a tax makes the wealthy fiduciaries of society's capital stock, now seen as the main element of social property. The article is presented as an extended illustration of a political and interpretive argument, in the spirit of John Rawls.
Abstract: Three experiments carried out on the World Wide Web assessed the consistency of attitudes toward various tax regimes that differed in their overall levels and degrees of tax rate graduation in the presence of framing manipulations. The regimes had two components: an income and a payroll tax. One frame involved aggregation. Subjects were asked either to design a single, global tax system or to vary one component of a tax system (payroll or income tax) with the other component held constant. The idea was to replicate the effects of income tax reform given a constant payroll tax system. Consistent with the experimental hypothesis - though not with "rational" decision making - subjects focused on the component they were asked to manipulate and did not respond fully to changes in the other part, across conditions, rejecting an underadjustment bias as well as a framing effect. The results are akin to Thaler's "mental account" model for personal financial behavior. A second manipulation involved a "metric" frame: whether putative tax burdens were given in dollars or percent terms. Once again consistent with the experimental hypothesis, subjects preferred higher rates of graduation when matters were stated in percent terms. The results point to the lability of public opinion about important questions of public finance.
Abstract: Tax and other fiscal policy systems inevitably affect patterns of work, marriage, household formation, child-bearing, and more. These 'micro-level' concerns are important subjects for 'fiscal sociology' to consider from a multidisciplinary perspective. This essay looks at some gendered aspects of taxation in a world-wide and historical perspective. It reveals surprising differences among countries, and a perhaps even more surprising open acceptance of fiscal mechanisms to shape household formation, meet natalist concerns, and affect the sexual division of labor. Amidst the diversity, three themes emerge: One, causes and effects are often hard to see in the dizzying complexity of tax and fiscal policy: there is a 'fog of tax,' akin to the 'fog of war,' making it hard even to understand what is going on. Two, in the complexity and haze, there is much room for rhetorical manipulation and even cognitive error. Three, when change does come, it more often than not favors the elite, and/or is predicated on macroeconomic concerns, such as the need for more or less female labor-force participation, or more or fewer children. Absent from the domain of fiscal politics, by and large, is a thicker substantive conception of rights or fundamental fairness, especially one looking to the dynamic effects of micro-level decisions about work and family on systemic patterns of discrimination and entrenchment. These various themes lead to a strong conclusion that more detailed work, on a country-by-country basis, is needed, simply to ascertain what is going on and why, and to a more tentative conclusion that the game may no longer be worth the candle: that there is good reason to be skeptical of complex tax and fiscal systems consciously or unconsciously aimed at 'social engineering,' even if we accept the inevitability of some non-neutral effects from any set of rules.
Abstract: Anglo-American law has long allowed an owner to do pretty much whatever she wants with her property, right down to the limiting case of using it all up or wasting it. The jus abutendi, or the "right of destroying or injuring [one's property] if one likes," has long been recognized as one of the basic rights in the "bundle of rights" that has come to symbolize property. On reflection, this affirmative right to waste is as puzzling - or ought to be - as it is entrenched. Where then did the right to waste come from? Why do we still have it to this day - indeed, why is it so taken for granted that we never seem to question it? More importantly, must we have it, as a descriptive matter? Should we continue to have it, as a normative one? This chapter explores these typically unexplored questions and argues against the continuance of the jus abutendi. It traces the evolution of the right to waste and shows its connections to an absolute conception of ownership developed largely in the context of an agrarian society and real property. It then canvasses what's wrong with waste from a political liberal point of view. This case takes on especial importance as value has moved away from land and into intangible, fungible units of value, paradigmatically money. A concern with wasting the family farm vel non has now become - or should properly become - a concern with depleting large stores of nominally private capital. The chapter concludes by proposing a revised conception of ownership with a practical law against waste, one that features a progressive consumption tax as its instantiation of the anti-waste norm. Among its other goals, the chapter thus aims at an important intellectual synthesis: the bringing of tax center stage in our thinking about property.
Abstract: All benefits programs impose burdens on some groups -- those that have to pay to finance them, those that are excluded, those whose conduct is regulated by the benefits program itself. Notions of normative family structure have typically been at the center of American benefits programs. This article compares and contrasts programs that benefit "core" families, with a working man and a stay-at-home wife, with those that benefit "non-core" cases. In each case, one example is drawn from the tax system, one outside. The social security system and marriage bonuses within tax illustrate benefits for the core cases; the welfare/workfare system and the earned income tax system illustrate benefits for non-core cases. In the former case, the status of the programs as benefits ones becomes lost in a reconstituted sense of the status quo or baseline; these programs are taken for granted, their burdens are not noticed, and they are not analyzed as instances of social engineering. In benefits programs for non-core cases, in contrast, the burdens are keenly noticed, support for the programs is fragile, and they are constantly analyzed in consequentialist terms.
Abstract: We argue that a spending tax, as opposed to an income or wage tax, is the “last best hope” for a return to significantly more progressive marginal tax rates than obtain today. The simple explanation for this central claim looks to incentive effects, especially for “rich people,” as both economists and commentators are inclined to focus. High marginal tax rates under an income tax fall on and hence deter the socially productive activities of work and savings. High marginal rates under a wage tax fall on and hence deter the socially productive activity of work alone. But high marginal rates under a spending tax fall on and hence deter high-end spending, which is arguably a social “bad,” and do not necessarily deter the social goods of work and savings. This is a possible empirical result. In this Article, we present the analytic arguments for it and sketch out a research agenda that might verify it. The idea is that because one can escape or defer paying taxes under a progressive spending tax by saving, an activity with positive social externalities, the efficiency costs of high marginal rates under a spending tax can be mitigated. Unless people work only in order to be able to spend on themselves, and even then only if they fully internalize in their present labor supply decisions the ultimate tax they will pay - and we argue that each of these assumptions is unlikely to hold in the extreme - a spending tax can bear more steeply progressive rates with less cost in efficiency or social wealth than can an income or wage tax. A progressive spending tax also holds out the possibility of sorting the rich or high ability into two groups, elastic savers and inelastic spenders, which could yield welfare gains unavailable under income or wage taxes, which under current technologies can only sort the high ability into workers and non-workers. Progressive spending taxes also fall on consumption financed by windfall gains, as to which unexpected good fortune ex ante incentive effects are likely to be weak.
Most of the Article sets out analytic possibilities. In the final Section, we add a sketch of a welfarist and a fairness-based argument for progressive spending taxes, and conclude with a call for a major new research agenda.
Abstract: There has been increasing rhetoric over the last decade about fundamental change in the nation's tax code. The reality of this period, in contrast, has featured minor changes within the existing structure and increasing complexity. This article argues that three inter-related factors -- the absence of more popular input, the failure of anyone in the political sphere to articulate sound and appealing basic principles, and the lack of a broadly acceptable policy alternative -- explain this gap. The article concludes with an argument for a progressive consumption tax as an example of a grand compromise that could help to achieve the goals of greater simplification and principle in tax.
Abstract: A large telephone survey conducted after the attacks of September 11 suggests that the willingness to tolerate discrimination varies significantly across domains, with a very high tolerance of discrimination against poorly educated immigrants and a strikingly low tolerance of discrimination against the genetically disadvantaged. Regardless of domain, tolerance is greater among men than among women. A survey conducted simultaneously over the World-Wide Web, using volunteer panels, replicated the phone survey results and revealed an even larger sex gap. This finding suggests that a social desirability bias leads women to overstate and men to understate their tolerance of discrimination in public.
Discrimination, sex differences, surveys, public opinion, social desirability bias
Abstract: This brief article summarizes an argument that the estate tax reform or repeal debate has always been about money: but not the government’s money from the tax, which is modest at best, but the politicians money from campaign contributions elicited to retain or repeal the tax. The article uses that theory to predict likely short term legislative developments.
Abstract: It is well known that there is a gender gap in American politics: that men and women in the aggregate vote differently for presidential candidates, for example. The precise determinants of the gap are less well known. Using existing data, mainly 1996 general election exit polls, this article explores the gender gap in relation to tax issues. It finds that while men and women have broadly similar attitudes or "primary preferences" about tax questions, the weighing of tax as an issue -- the "secondary preferences" -- differ, with men attaching more importance to tax as an issue than women. This result suggests, inter alia, that framing of political issues matter, and that a successful candidate may appeal differentially to each gender on the basis of different policy issues.
Abstract: The generally heated scholarly and political debates over Bush versus Gore, the election, and Bush v. Gore, the case, can be seen to relate to two competing visions of democratic theory and the role of the vote therein. Minimalists such as Richard Posner have low expectations for the role of individual voter participation; such theorists view the 2000 presidential election as a statistical tie that had to be broken, one way or another, and the U.S Supreme Court's role in breaking it as a perfectly acceptable, pragmatic act. Participatory democrats such as Cass Sunstein and Lani Guinier, in contrast, see individual voting as the constitutive act of democracy, and consider Bush v. Gore to be a violation of that process. In this Introduction to an edited volume, the authors trace out these competing theories and their implications for the politics of and prospects for voting reform in the United States.
Abstract: These are powerpoint slides from a presentation at a joint UCLA-Tax Policy Center Conference on Tax Policy in the Obama Era. The basic insight is that it will be difficult to raise significant revenue through the current tax system. Behavioral perspectives suggest that a series of small (or large) cuts, aiming towards a flattened rate structure - as we have seen in the Ronald Reagan and George W. Bush Administrations - are likely to be extremely popular. Undoing them with tax increases will be disproportionately psychically hard. Given that President Obama faces the perceived need for short term stimulus, likely meaning more small tax cuts, meeting his ultimate goals of reducing deficits and restoring more progression to the tax system will be difficult, if not impossible. Ultimately, the insights of behavioral economics may be most important in reconsidering the institutional mechanisms that produce tax and spending policy.
Abstract: The traditional view of tax holds that consumption taxes fail to tax the yield to capital, whereas income taxes do, leading to John Stuart Mill's criticism of the income tax as a "double tax" on wealth that is saved. A better analytic understanding illustrates that there are two types of consumption taxes. A prepaid consumption or (equivalently) wage tax indeed ignores the yield to capital. But a consistent progressive postpaid consumption tax gets at such yield, at the individual level, when but only when the returns to capital are used to elevate lifestyles in material terms. Such a tax allows "ordinary" savings that move around labor earnings, in constant dollar terms, to different periods of an individual's life, such as times of retirement or heightened medical or educational needs. Because a progressive postpaid consumption tax falls on the yield to capital at the right time - when its use at the individual level becomes manifest - all other taxes on capital, such as capital gains, gift and estate, and corporate income taxes, can and should be repealed, in the name of fairness.
Abstract: This paper examines the relationship between attitudes on potential uses of the budget surplus and gender. Survey results show relatively weak support overall for using a projected surplus to reduce taxes, with respondents much likelier to prefer increased social spending on education or social security. There is a significant gender gap with men being far more likely than women to support tax cuts or paying down the national debt. Given a menu or particular types of tax cuts, women are marginally more likely to favor child-care relief or working poor tax credits whereas men are marginally more likely to favor capital gains reduction or tax rate cuts. When primed that the tax laws are biased against two-worker families, men significantly change their preferences, moving from support for general tax rate cuts to support for working poor tax relief, but not to child-care relief. One of the strongest results to emerge is that women are far more likely than men not to express an opinion or to confess ignorance about fiscal matters. Both genders increase their "no opinion" answer in the face of priming, but men more so than women. Further research will explore this no opinion/uncertainty aspect.
Abstract: These are slides from a presentation to the President's Advisory Panel on Tax Reform, given in Washington D.C. on May 11, 2005, updated, with additional slides, and sources at the end. The principal goal is to summarize the mechanics and analytics of a consumed or cash-flow income tax, a progressive spending tax, based on a rearrangement of the Haig Simons identity, Income = Consumption Savings, to generate Consumption = Income - Savings. A consistent spending tax simply features unlimited deductions for savings, along the lines of traditional Individual Retirement Accounts (IRAs), plus the inclusion of debt as a cash-flow input (the fatal flaw of the 1990s USA Tax Plan was its failure to include debt in the tax base). Progressive rates can be maintained, even increased. The critical point is that such a progressive postpaid consumption, cash-flow or (all equivalently) spending tax is not equivalent to a wage tax, and does not systematically exempt the yield to savings from the tax base. Instead, a consistent progressive spending tax stands between an income tax, which double taxes all savings, and a prepaid consumption, yield exempt, or (all equivalently) wage tax, which never taxes any savings. A consistent progressive spending tax taxes the yield to capital when (but only when) it is used to elevate material lifestyles, not when capital transactions (savings, investing, borrowing) are used to smooth out, in time, a taxpayer's labor market earnings. This is an attractive ideal, as argued at greater length in McCaffery 2005a. It is also noted that such a progressive spending tax is a normatively attractive "hybrid," in that it taxes some but not all savings, and in a principled and appealing way, in contrast to the flawed practice of engrafting consumption tax elements (of either sort, pre or post paid) onto an income tax base. See McCaffery 2005b.
Abstract: Hybrid income-consumption taxes seek to tax some but not all savings, the treatment of savings being the principal difference between an income and a consumption tax. Some hybrids, however, simply move the tax system towards a prepaid consumption or wage tax; others, by allowing arbitrage, risk making all taxation voluntary. A consistent, progressive postpaid consumption tax, in contrast, gets matters just right, by design: it allows ordinary savings, for times of retirement or medical or educational needs, to lower the burden of taxation, while falling on the yield to savings when it is used to elevate lifestyles. It is, in short, a good hybrid.
Abstract: This brief commentary on David Weisbach's essay (available on ssrn at http://ssrn.com/abstract=911604) first identifies Weisbach's contribution as stating an Equivalence Theorem: putting aside matters affecting the taxation of the pure riskless rate of return, any method of implementing an income tax has an equivalent consumption tax implementation method, and vice versa. Stated thus, the Theorem, like the Coase Theorem, follows from definitions: if the only real difference between an income tax and a consumption tax is the taxation of the pure, riskless rate of return, then there are no other differences between income and consumption taxes. But this is not to say that Wesibach's formulation of the idea is not interesting and important, like Coase's theorem. Weisbach illustrates the Equivalence Theorem with four major areas of implementation detail: cash method versus basis accounting; individual versus business level remission of taxes; open versus closed transactional accounting systems; and international coordination mechanisms. After reviewing this briefly, the Commentary goes on to situate the Equivalence Theorem in a wider intellectual history of the analytics of tax, noting four "waves" in the understanding of broad-based income versus consumption taxes, in which David Bradford played a central role; to comment on the normative implications of the analytics of tax; and, finally, to note what is, and what is not, at stake in understanding equivalent "implantation methods." The Commentary concludes by asking for more work in the spirit and manner of both Davids, Weisbach and Bradford.
Abstract: This is a written version of testimony given to the Joint Economic Committee in November, 2003, subsequently published in Tax Notes. Meaningful simplification is possible, but depends on fundamental tax reform. Fundamental tax reform must start with the tax base, logically distinct from tax rates. Under progressive marginal rates, the two standard forms of consumption tax, prepaid, yield-exempt or (all equivalently) wage, and postpaid, cash-flow or (all equivalently) spending, are not equivalent. Actual tax policy today is drifting towards a flat wage tax, which never includes the yield to capital in the base. A more liberal answer is a progressive spending tax, which does tax the yield to capital, under just the right conditions: when but only when this yield facilitates higher material lifestyles. Hence such a tax stands between an income tax, which double taxes all savings, and a wage tax, which taxes none. A consistent progressive spending tax also generates great simplification, because all further taxes on capital, such as the corporate income or gift and estate taxes, can be reduced or repealed, and all rules about capital gains, losses, realization, recognition and so on become moot. Even further simplification can obtain by substituting another form of spending tax, such as a VAT or a national retail sales tax, plus a rebate for the two lowest brackets of the progressive spending tax, leaving a supplemental spending tax only for the wealthy, such as households spending over $100,000 per year.
Abstract: These are brief comments on an excellent paper by Jeffrey Liebman and Richard Zeckhauser, prepared for a conference sponsored by the Urban Institute and Brookings on tax and health care policy. Liebman and Zeckhauser summarize the complexities involved in making optimal health insurance decisions, and offer generally cautionary notes about conflating these with tax law (a theme of the conference). Most importantly, Liebman and Zeckhauser suggest a positive role for employers in health care and insurance decisions, as better setters or framers of choice sets - witness 401(k) plans. In this Commentary, I applaud Leibman and Zeckhauser's general work and particular observation, generalizing that behavioralist approaches might often lead to a search for the "best decider," akin to the search for the "least cost avoider" or "best cost spreader" in law and economics and tort law (e.g., the work of Guido Calabresi). I caution against an approach to behavioralism that simply lists "one damned bias after another," and suggest that the case against simply turning health insurance choices over to consumers is overdetermined by behavioral economics, bounded rationality, common sense and experience (cf. experience with Medicare prescription drug plan, subprime mortgage crisis, etc., etc.). I nonetheless suggest that the insights of behavioralism can be used to better guide policy-makers today. For example, lawmakers should consider the complexities of choices that their policies ask individuals to make, and take a Hippocratic Oath to "do no more complexity" (which argues strongly against the continued conflation of tax and health care policy). Competition should focus on meaningful real variables, such as the quality, range, and location of care providers, and less on financial variables, such as the levels of deductibles and co-pays, which can helpfully be standardized to prevent distracting competition along these lines.
Abstract: This was the question posed at the Herman Goldman Memorial Lecture, held at the Bar Association of the City of New York on the evening of May 22, 2000. Its topicality, given the Ways and Means Committee's decision to repeal the federal estate and gift tax, is obvious. Taking the affirmative, and presenting the case for the repeal, was Edward McCaffery, Maurice Jones Jr. Professor of Law, University of Southern California. Taking the negative, and presenting the case against repeal, was Charles Davenport, Professor of Law, Rutgers University-Newark. Judge James Halpern, United States Tax Court, presided (although he did not enter judgment); and Willard Taylor, Chair of the Herman Goldman Lecture Committee, introduced the speakers. No transcript was made of the debate, but the speakers have set out (in the paper) a summary of their arguments, and Judge Halpern has provided his comments. Attached at the end is a selective bibliography of the literature relating to the repeal of the federal estate and gift tax.
Abstract: In this piece, written for the 4th of July, Professor McCaffery, a self-proclaimed liberal, and Professor Wagner, a long-standing libertarian, join forces to rebut some of the most common arguments for retaining the gift and estate tax. Adapted and reprinted by permission from Policy Study, a publication of Public Interest Institute.
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