Podcast Summary
People give more when they believe their contribution matters: People's willingness to donate or pay taxes may be influenced by their perception of the recipient's value and their belief that their contribution will make a difference.
People's willingness to give money, even to the government, can be influenced by the perceived value or purpose of the recipient. The experiment conducted by economist Katherine Echol, which involved dictator games and charitable donations, showed that people are more likely to give when they believe their contribution will make a meaningful difference. Echol's research challenges the traditional economic theory that people are solely self-interested and provides evidence of altruistic behavior. However, it's important to note that some criticisms have been raised regarding the validity of the dictator game results. Nonetheless, the findings suggest that people may be more willing to pay taxes or donate to the government if they feel their contributions are making a positive impact.
Giving taxpayers control over tax funds could increase compliance: Allowing citizens to choose how a portion of their taxes are used and receiving a small gift in return could potentially increase tax compliance, reducing the tax gap and making tax policy more effective and efficient.
People may be more willing to pay their taxes if they have some control over how the funds are used. A study by Catherine Eckel showed that people were almost as likely to donate to a government organization for disaster relief as they were to a private charity, when given the option to earmark their donations. This concept could potentially be applied to the tax system to increase compliance and reduce the tax gap. The US tax gap is significant, with around $496 billion in unpaid taxes each year. By allowing citizens to choose how a portion of their taxes are used and even receiving a small gift in return, tax compliance could potentially increase, making tax policy more effective and efficient.
Tax evasion: A persistent issue contributing to a large tax gap: People go to great lengths, including potentially dying before a tax reform, to evade taxes, particularly for self-employment income and opaque sources, contributing to a significant tax gap in the US.
Tax evasion, particularly for those with self-employment income or opaque sources of income like business partnerships and investments, is a significant issue contributing to a nearly half-trillion dollar tax gap in the United States. The study "Dying to Save Taxes" found that the probability of dying just before a tax reform to save taxes is 1.6%, indicating the lengths some people go to avoid taxes. Self-employment income, where there is no third-party reporting, has a much higher non-compliance rate, estimated to be over 60%, compared to the 1% for employees with wages and salaries. Tax evasion, which is illegal, contrasts with tax avoidance, which are legal ways to reduce taxes. Historically, tax evasion has been a persistent issue in societies.
Historical forms of tax avoidance and evasion: People have found creative ways to minimize tax liability throughout history, from bricking up windows to creating professional lady rejectors, and the wealthy continue to explore new methods as debates over new taxes arise
Throughout history, taxes have been a contentious issue leading to various forms of avoidance and evasion. From ancient Egypt to modern times, people have gone to great lengths to minimize their tax liability. In England, for instance, homeowners bricked up windows to reduce window taxes, while in some countries, bachelor taxes led to the creation of professional lady rejectors. With recent discussions of new wealth taxes in the US, it's likely that the wealthy will continue to find creative ways to avoid or evade these taxes, as seen in Europe where revenues have been low and many millionaires have left.
Two reasons for tax compliance: fear and social pressure: IRS explores ways to increase funding for audits to boost compliance, allowing taxpayers to earmark taxes for causes could encourage willingness to pay
Fear of audits and social pressure are two primary reasons why people comply with paying their taxes, despite the universal dislike for them. However, researchers suggest that making taxpayers feel good about their contributions could increase compliance and even encourage generosity. The IRS, which has a limited budget and resources for audits, is exploring ways to increase funding to potentially increase compliance and returns. Additionally, allowing taxpayers to earmark their taxes for specific causes could increase their willingness to pay.
Allowing people to allocate funds increases donations and tax compliance: People are more likely to comply with taxes and donate more when given the option to allocate funds to specific causes, potentially increasing compliance by up to 15%.
Allowing people to have a say in how their tax dollars are spent could significantly increase tax compliance. According to a study by Eccles and further research by Kate Lambertin, people are more likely to donate twice as much to a specific cause when given the option to allocate funds, rather than contributing to a general fund. The unpleasantness of paying taxes is partly due to the decoupling effect, where the payment is not directly connected to a tangible benefit. Providing access to data on how taxes are spent can help reconnect the payment to the benefit, but it doesn't address the issue of agency. Lambertin's study suggests that allowing people to allocate a portion of their tax dollars could increase compliance by up to 15%. However, it's important to note that people may not always align their preferences with the needs of the government, and only allowing a small percentage of the tax bill to be allocated addresses this concern. The concept of participatory budgeting, where citizens can vote on how a portion of the municipal budget is spent, has been tried in some local governments as a potential solution.
Exploring Japanese Tax System for More Control and Better Outcomes: Japanese hometown tax system offers an intriguing approach to giving people more control over their tax payments, potentially leading to increased revenue.
There is an ongoing debate about how money should be allocated, and some argue that expanding the expression of agency on the federal level through tax forms could be a solution. This mechanism, known as participatory budgeting, may not significantly alter the overall federal budget, as defense spending tends to dominate and other categories see minimal change. Economist Jesper Cole, an expert on Japanese politics and economics, believes the Japanese economy, despite its structural issues, produces excellent outcomes for its citizens. One intriguing tax idea from Japan that Cole admires is the hometown tax system, which we will explore after the break. Overall, the idea of giving people more control over their tax payments could potentially lead to increased revenue, and the Japanese system offers an interesting approach to this concept.
Japan's Hometown Tax System: Bridging Urban-Rural Divide and Supporting Aging Population: Japan's Hometown Tax System encourages citizens to support local communities, fosters entrepreneurial spirit, and creates incentives for regional development by allowing tax-deductible donations to any region, generating a market mechanism and competition among different regions.
Japan's hometown tax system, introduced in 2008, is an innovative approach to address the urban-rural population imbalance and aging population issue. This system allows individuals to make tax-deductible donations to any region, not just their hometown. The donation can be seen as a purchase of local products or services, creating a market mechanism and competition among different regions. The policy is particularly effective in Japan due to its strong cultural emphasis on local products and traditions. Despite some criticisms, such as disproportionately benefiting higher income households, the hometown tax system is an important part of Japan's tax deductibility system, as charitable giving is not as prominent in the country. Overall, this system fosters entrepreneurial spirit, creates incentives for regional development, and encourages citizens to support local communities.
Japan's Hometown Tax System: Challenges and Opportunities: Despite challenges, Japan's Hometown Tax System drives local growth and entrepreneurship, particularly for small businesses in rural areas. A hybrid structure using national policies incentivizes local production and sales while maintaining tax compliance.
Japan's hometown tax system, while designed to stimulate local entrepreneurship and income redistribution, has faced challenges such as competition for offering valuable gifts, uneven distribution of funds, and local government abuse. Despite these issues, the system has also driven genuine private sector growth and entrepreneurship, particularly for small businesses in rural areas. The key idea is to create a hybrid structure using national policies to incentivize local production and sales while maintaining tax compliance. However, some experts caution that the strong cultural norm of tax compliance in Japan may pose challenges in implementing such a system in other countries. Ultimately, the hometown tax system is a complex solution with both intended and unintended consequences, requiring careful regulation and implementation.
Incentives can have unintended consequences: Incentives can encourage behaviors but may disrupt systems and crowd out intrinsic motivation. The potential introduction of a US hometown tax program raises questions about competition and government campaigning for donations, while increased civic engagement and accountability could be valuable outcomes.
Incentives, while effective in encouraging certain behaviors, can also have unintended consequences and potentially crowd out intrinsic motivation. This was highlighted in the discussion about Japan's hometown tax program, which initially saw increased donations due to incentives but may have ultimately led to decreased compliance when the incentives were removed. Economists believe that incentives can be powerful tools, but there is growing evidence that they can also disrupt systems that function well without them. The potential introduction of a similar program in the US, allowing taxpayers to direct funds to specific agencies, raises questions about the potential for increased competition and government campaigning for donations. While there may be frustration and backlash, increased civic engagement and accountability could be valuable outcomes. Additionally, the discussion touched on the disconnect between what people say they believe and what they're willing to do, with a focus on corporate social responsibility initiatives and the potential impact of job creation on individuals and communities.
Ancient Chinese beard tax as a tool for population control: Ancient Chinese beard tax served as a means for population control and revenue generation, showcasing the importance of social norms and their far-reaching impacts.
" This intriguing social experiment originated in ancient China, where men were required to pay a tax if they wanted to grow a beard. This tax served as a way for the government to regulate and control the population, as well as generate revenue. The idea may seem trivial, but it highlights the power of social norms and the lengths people will go to conform to them. It's a reminder that seemingly insignificant rules and regulations can have profound impacts on society. The Freakonomics Radio Network, hosted by Neil Karuth, Gabriel Roth, and Stephen Dubner, continues to explore such fascinating quirks of human behavior. Their theme song is "Mr. Fortune" by the Hitchhikers, and all other music was composed by Luis Guerra. Don't forget to check out their podcast on Stitcher for more thought-provoking discussions.
