Thinking About Tax

40 Pages Posted: 23 Jul 2004

See all articles by Edward J. McCaffery

Edward J. McCaffery

USC Gould School of Law

Jonathan Baron

University of Pennsylvania - Department of Psychology

Date Written: July 16, 2004


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.

JEL Classification: A12, H20

Suggested Citation

McCaffery, Edward J. and Baron, Jonathan, Thinking About Tax (July 16, 2004). USC Law School, Olin Research Paper No. 04-13; and USC CLEO Research Paper No. C04-10. Available at SSRN: or

Edward J. McCaffery (Contact Author)

USC Gould School of Law ( email )

699 Exposition Boulevard
Los Angeles, CA 90089
United States
213-740-2567 (Phone)
213-740-5502 (Fax)

Jonathan Baron

University of Pennsylvania - Department of Psychology ( email )

3815 Walnut Street
Philadelphia, PA 19104-6196
United States
215-898-6918 (Phone)


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