Thinking about tax.

Edward J. McCaffery, Jonathan Baron

Psychology Public Policy and Law · 2006 · 127 citations · 38 references

Concepts

TL;DR

People’s decisions in tax and public finance are affected by an isolation effect that causes them to focus on salient aspects while ignoring relevant information, leading to problematic outcomes. The article investigates how people perceive different aspects of tax‑law design through a series of experiments. The experiments show that people’s judgments of public finance are heavily biased by heuristics, enabling politicians to manipulate public opinion and creating a persistent gap between observed and optimal tax systems.

Abstract

This article reports the findings of several experiments about perceptions of various aspects of tax-law design. The authors find that people are vulnerable to a wide range of heuristics and biases in evaluating public finance systems, leading to inconsistent judgments and evaluations. These errors in judgment are specific instances of a more general isolation effect, whereby people respond quickly to a decision or choice set, focusing on salient aspects while ignoring or underusing logically relevant information that is not immediately before them. In tax and public finance, this tendency to make decisions as if with blinders on is problematic. As a result of it, skillful politicians can manipulate public opinion, and 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.

References

38