Posted: 9 Feb 2020
Date Written: May 16, 2019
This Article seeks to recognize the behavioral biases and long-run policy implications of tax incentives beyond the picture portrayed in tax returns and balance sheets. Tax laws can create benefits that take effect before (ex-ante incentives) or after (ex-post incentives) the controlled behavior occurs. Although the differences between the two types of incentives are effectively indistinguishable to lawmakers — they have unlike real-world effects. This is especially true in light of recent debates on the growing inequality gap and whether tax incentives indeed improve our decisions about health, wealth (physical and economic), and happiness. This Article examines these discussions from the lens of “fiscal causation”, denoting the correlation between behavioral incentives and their factual outcomes. It demonstrates that intrinsic and extrinsic heterogenic factors play a major role in fiscal causation or lack thereof. Uncertainty, complexity, and administrability of such measures are intrinsic factors that play a major role in whether to utilize ex ante or ex post tax incentives. Whereas, unique process heterogeneity outside tax forethought, such as a firm’s financial wellness, business cycles it undergoes, and decision-making process take priority and disconnect the cause and effect between the ex-post tax incentive and taxpayers’ targeted behavior. The paper uses the research tax credit (“research credit”) as a case study to point to intrinsic and extrinsic dynamics that hinder decision-makers from internalizing the benefits of the research credit, thus creating a non-causal gap between the actual outcome of the credit and its intended fiscal purpose.
Keywords: Tax, Causation, inference, research, incentives, benefit, tax breaks
JEL Classification: k34
Suggested Citation: Suggested Citation