What Cognitive Psychologists Should Find Interesting about Tax
Hill, Claire A., Psychonomic Bulletin & Review
People have to pay taxes, and usually they do-even though they would rather not. What determines whether and how much they decide to pay depends on more than a cost-benefit calculation. Results from the literature at the intersection of economics and psychology suggest that many factors are relevant, including people's perceptions of how the money is being spent, and who (else) is being asked to pay taxes. The results also suggest ways in which government may be able to use framing and various biases to influence payment of and attitudes toward tax. But much remains unknown, including, importantly, the extent to which tax incentives influence behavior.
For many and, perhaps, most people, tax elicits a visceral and unpleasant reaction-and not just paying tax, but even simply hearing about it, as though it were somehow distasteful. This is true even for law students and many (nontax) lawyers and law professors. As a law professor who sometimes writes about tax I can, and not infrequently do, argue that tax is actually much more interesting than most people think.
Among the interesting questions are those in the realm of psychology: Why do people choose to pay taxes? It is not just because they think they will be caught and punished if they do not. What are the other determinants? If people think others in their community are, or are not, paying tax, does it affect their willingness to pay tax? What about others in their greater society? What principles do people have about how taxes should be assessed? To what extent are people self-serving in their assessments of who should pay what amount of tax? What kinds of strategies can the government use to affect how people feel about tax and their willingness to pay? How do heuristics and biases affect how people perceive particular taxes? Do people's heuristics and biases provide an argument for certain kinds of taxes? All these questions are importantly about the psychology of tax.
"Where there is an income tax, the just man will pay more and the unjust less on the same amount of income."
"Income tax has made more liars out of the American people than golf."
- Will Rogers, humorist
"Only the little people pay taxes."
- Leona Helmsley, quoted by her maid
The issue on which the most work has been done is tax compliance: What determines whether people will choose to pay tax?1 The hypothesis that the determination is based purely on a rational cost-benefit analysis-that is, a computation of how likely a person is to get caught if he does not pay, how much tax he can avoid, the legal consequences of being caught, and how much trouble it takes to avoid tax-has been soundly rejected. People comply a great deal more than such considerations can justify: Paying tax is, in significant measure, voluntary, given current levels of enforcement (Andreoni, Erard, & Feinstein, 1998; Cullis, Jones, & Lewis, 2006a, 2006b; Feld & Frey, 2007; Kirchler, 2007; Torgler, 2007). There is evidence for each of the following as a determinant of tax compliance: a person's ethics, religious beliefs, moral conscience, and honesty; whether a person anticipates guilt and shame from noncompliance;2 and the social norms of the group a person identifies with (Kirchler, 2007; Torgler, 2007). A generic recourse to risk aversion might work as an explanation-people will pay a great deal to avoid risk, even if the risk is remote-but such an explanation is distinctly unsatisfying, especially given the size of the benefit relative to any plausible estimation of the risk.3
Of course, economic factors are relevant-most notably, the probability of detection. All else being equal, a person who receives some income in cash "off the books" is less likely to report it than is someone who receives a paycheck in the same amount for the same work, where the salary information is also being sent by the employer to the IRS. …