Tag Archives: tax

IRS Should Just Hire a Bunch of Direct Marketers and Listen to My Mom

During a show about how much tax revenue the IRS doesn't collect – 17% or $450 billion a year – the folks at Freakonomics talk about how a little-known unit of the British government called the Behavioral Insights Unit gooses the UK's tax collection efforts:

One of my favorite examples of this comes from a small unit in the British government called the Behavioral Insights Team.  What they do is experiment with all kinds of cheap and simple nudges.  For instance, sending out letters that appeal to the herd mentality in all of us. Here is the unit’s director, David Halpern:

David HALPERN: So what we do is we simply tell people something, which is true, which is 9 out of 10 people in Britain pay their tax on time. And by putting that single bit of information into the top of a letter, it makes people much more likely themselves to pay the tax on time.

GARDNER: So it’s peer pressure?

DUBNER: That’s exactly right — we like to run with the herd.  They also tried another super simple trick, which was just handwriting a message on the outside of the tax envelope.  This message would just say simply that the contents are important, but it’s written in hand.

HALPERN: Of course people are like ‘oh my God, but how can that possibly be practical?’ Well we’ve now just got the results in. It turns out that for every pound or every dollar that you spend on getting, you know, someone to write on the envelope, you get $2,000 return.  A one to 2,000 return. So it’s a nice simple illustration of these small things and how consequential they are.

Anyone who's spent even a week working as a direct marketer could have told you this would work. The IRS should just hire a bunch of laid off direct marketing folks and they'd pay for themselves in no time.

Later in the podcast they talk about an idea from a behavioral psychiatrist at Duke:

Dan Ariely, a behavioral psychologist at Duke, has a nice idea: to let taxpayers direct a small portion of their tax money to the parts of the government that they most care about:

Dan ARIELY: So I’m not sure what’s the right percent — five percent or ten percent.  But what if we got people to have a say about where some of the taxes go? All of a sudden you’re not looking at it as you against the government.  You’d have to look carefully at all that the government is doing for us — building libraries and roads, and education and military and so on and so forth and say, what do I care about?

My mother made this same argument when I was a kid. Her argument was that if she could earmark even one or two percent for any program/department of her choosing she'd feel better about paying her taxes in general. She also made another interesting point: taxpayers would be able to indicate with their dollars which programs they felt were most important. In essence we'd be able to tell which programs were truly valued by us, the taxpayers, and not have to trust politicians to divine what we wanted. That's why I figured it would never come to pass, and I haven't been wrong yet.

Unintended Consequences

Most of us are familiar with the law of unintended consequences (for those of you who aren't, prohibition would be a good place to start your research) and this post at Tax.com has me wondering if all those folks fighting Obamacare in the courts might have considered the unintended consequences if they win:

The only difference between the mandate and your common tax incentive is that Congress framed the incentive as a tax penalty instead of a tax break. I recognize there might be a legal difference between the two approaches that is beyond my comprehension. But the Court, Congress, and the public should understand that economically the two approaches are exactly the same…

A tax penalty and a tax incentive have the same economic impact on affected and unaffected individuals. They have the same effect on the goals the government is trying to achieve. They have the same effect on government revenues. It is possible, then, that they have the same effect on freedom and constitutional principles.

So armchair constitutional scholars should enjoy the show. But please excuse us economists if we tune out. Perhaps too blithely, we assume the mandate will be affirmed because the nation's leading legal gurus won't want to open up a can of worms that makes all tax incentives subject to constitutional challenge. If by chance the court does strike down the mandate, by all means give us a call. It could be the beginning of the end for all those complex and inefficient tax incentives we have been complaining about all these years.

So a question for you legal scholars out there: if the Supreme Court strikes down Obamacare is my wonderful deduction for mortgage interest soon to follow?

Real World Impact of Crappy Journalism

From David Cay Johnston at Tax.com:

When it comes to improving public understanding of tax policy, nothing has been more troubling than the deeply flawed coverage of the Wisconsin state employees' fight over collective bargaining.

Economic nonsense is being reported as fact in most of the news reports on the Wisconsin dispute, the product of a breakdown of skepticism among journalists multiplied by their lack of understanding of basic economic principles. 

Gov. Scott Walker says he wants state workers covered by collective bargaining agreements to "contribute more" to their pension and health insurance plans.

Accepting Gov. Walker' s assertions as fact, and failing to check, created the impression that somehow the workers are getting something extra, a gift from taxpayers. They are not. 

Out of every dollar that funds Wisconsin' s pension and health insurance plans for state workers, 100 cents comes from the state workers.

How can that be? Because the "contributions" consist of money that employees chose to take as deferred wages – as pensions when they retire – rather than take immediately in cash. The same is true with the health care plan. If this were not so a serious crime would be taking place, the gift of public funds rather than payment for services…

The collective bargaining agreements for prosecutors, cops and scientists are all on-line

Reporters should sit down, get a cup of coffee and read them. And then they could take what they learn, and what the state website says about fringe benefits, to Gov. Walker and challenge his assumptions.