Tax Break

For today’s “man bites dog” bulletin, a recent academic paper studying the relationship between behavior and taxes has found people gain value, or “utility,” from paying taxes.

Yes, tucked in the subconscious reaches of your brain is a notion that taxes are a social good. The problem for tax writers: The tax code is so complex that people do not associate the communal value with tax payments.

The paper - ”Tax affinity hypothesis: Do we really hate paying taxes?” - was published in February by a professor and a former student at Wesleyan University in the Journal of Economic Psychology.

The authors’  “tax affinity” argues that while people would rather keep their tax dollars, and spend them on themselves, paying tax dollars “is not equivalent to throwing the money away.”

For starters, the authors argue there are social benefits the brain recognizes that apply to taxes. There’s a “warm glow” feeling derived from paying taxes to improve others’ well being. People dislike inequality and want to maintain a good self-image, meaning people are surprisingly unlikely to cheat on their taxes, the authors said.

Surprisingly,  in experiments the authors found people worked harder knowing they would be taxed. For example, participants worked harder when they were paid $100 and $10 was paid in taxes than when they were paid $90 with no taxes.

For these triggers to work, it is essential that people recognize their tax dollars at work.

“By making it really clear what your tax money is used for, it can actually increase the utility that you get from paying taxes,” said Iwan Djanali, the student co-author,  in an interview.

Djanali, who is studying now at Harvard Business School, cautioned that the paper should not be used to indulge any political ideologies. But for the tax system to work, people need to see their money in action:

“It’s really important to make the tax system very transparent.”