Thinking about Tax
Edward J. McCaffery
USC Gould School of Law
University of Pennsylvania - Department of Psychology
July 16, 2004
USC Law School, Olin Research Paper No. 04-13; and USC CLEO Research Paper No. C04-10
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.
Number of Pages in PDF File: 40
JEL Classification: A12, H20
Date posted: July 23, 2004
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