In praise of invisible payments

By Felix Salmon
February 27, 2010

One consequence of going on staff at Reuters last April is that I got a W2 this year for the first time in a decade, and I’m pretty impressed at how much money I managed to pay the government, without even trying, in 2009. I know that if I was paying the same kind of money in big quarterly checks, as I used to when I was freelancing, it would have hurt much more.

Eric Felten explains what’s going on here:

Policymakers have long understood that the less visible—or “salient,” to use the economist’s term of art—a tax is, the easier it is to raise. Which is why Milton Friedman, looking for ways the federal government could collect more money during World War II, recommended the creation of income tax withholding (an innovation he was not proud of).

I agree with Felten on the mechanism at play here, but I disagree that it’s a bad or invidious thing. In a world where people want to maximize their own happiness and minimize their own pain, it makes sense to automate and otherwise anesthetize as much as possible things like tax collection. If I’m happier paying more taxes less visibly, then isn’t that Pareto-optimal for all concerned?

Felten says that he would rather scrounge for change at a parking meter and at tollbooths, rather than pay painlessly with a cellphone or EZ-Pass, precisely because he wants to feel frustration and annoyance at paying those fees: “those are just the emotions I want to cultivate toward the entire enterprise,” he writes. Which, I suppose, is his right. But most of us — those of us who tend towards the sensible — are much more likely to want to minimize the frustration and annoyance in our lives.

This is one reason the Netflix business model is so elegant. I’m sure I pay Netflix much more money on an annual basis than I ever used to pay in DVD rental and late fees. But the frustration and annoyance involved in returning DVDs and paying late fees was enormous, and now all of that has gone away, and I’m happier.

And this is also a reason to love systems like the Oyster card, in London, where you merrily tap your way in and out of the subways and buses without spending much if any time worrying about how much it’s costing you. It’s a much more pleasurable way of getting around than the old system of buying tickets — and it also makes it easier for Transport For London to raise prices, if and when that becomes necessary. In general, the less visible any price rise is, the less pain it causes, and the happier everybody is.

There are limits, of course, to my happiness with such solutions. Sleazy companies like Vertrue, Ben Stein’s employer, who trick you into paying monthly fees on your credit card, are pretty evil — but mainly because you’re doing so unwillingly, and wouldn’t pay those fees at all if given a choice. Similarly for overdraft fees, monthly checking-account fees, and all the other ways that banks have of extracting money unwillingly from their depositors.

But when it’s a matter of degree rather than kind — when you’re willing to pay something, but would just rather not think about it when you do — then these kind of automated payments are a godsend, especially if you’re disciplined enough to manage your monthly cashflow and notice when it’s getting out of control. (Hint: look to see if the balance on your credit card is going up rather than down.) So let’s welcome easy ways of paying for parking, along with easy ways of paying taxes. They’re a lot less unpleasant than the alternatives.

4 comments

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What I like about the Oyster card (as a Londoner) is it permits a form of tax to be extracted from visitors to the City who don’t bother to get one: Oyster fares are much lower than pay-as-you-go ones. Very politically clever for the former Mayor who introduced it too, as visitors don’t have a vote.

Posted by Gaw | Report as abusive

I agree with you as far as things you know you’re going to purchase at the given price anyway, but you seem to suggest a weird “all-or-nothing” paradigm for willingness to pay. (“Whether I’m willing to pay fees,” versus “how much I’m willing to pay in fees.”) If I work out every time MTA raises its fares that, yes, paying $n a week to use it a certain way is approximately optimal, and then don’t think a whole lot on a day-to-day basis about how much I’m spending, then that makes sense to me. If they raise fares to $10 a ride, just because it doesn’t cause me to start running up credit card debt doesn’t mean I shouldn’t change my behavior, and certainly wouldn’t make it acceptable for them to find a way to charge me without my even knowing how much it costs now. (There’s a reasonable range of ways in which one can define the distinction between making something knowable to the public versus hitting them over the head with it; Felten seems to be insisting that people be hit over the head with it.)

Similarly, I’m comfortable with withholding taxes provided I think people are assessing rationally once in a while exactly how much taxes are costing them. If withholding is the opiate of the masses, designed to be able to tax them more than they would put up with otherwise, then I agree with Felten that it’s a problem.

Posted by dWj | Report as abusive

I’d be more inclined to stop a behaviour (video renting) before paying blindly for it.

I don’t mind when taxes are hidden, however. Especially sin type.

Posted by drewbie | Report as abusive

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