Monday, April 16, 2012

Paying Taxes Makes You Feel Good

Well, or perhaps satisfied with your contribution to the greater good.  Miller McCune reports

“Economists generally assume that human beings get ‘zero utility’ from paying taxes,” lead author Iwan Djanali, who co-authored the study with his adviser, Daimen Sheehan-Connor,  said in an interview. “Zero utility is econ-speak for, ‘You get no benefit out of it.’ Obviously, consumption gives you a lot of utility. If you buy an apple, it satisfies your hunger.
“We believe that paying taxes also gives you some utility, even though you’re enjoying less consumption. You get some ‘soft utility’ out of it. We call this ‘the warm glow.’ You feel good about helping others, even though you don’t get a direct monetary reward out of it.”
The conclusions are drawn from an experiment in which some groups were paid a flat amount to do a task, and the others a net amount which yielded the same after tax as the first group.

The standard economic model would predict they’d work equally hard in both conditions, since the amount of money they walked away with was the same. Instead, they worked “significantly more in the presence of tax,” the researchers report.
This effect showed up across the board, but much more strongly in students whose major was something other than economics. “Economics majors apparently perceived less utility from paying taxes, which makes sense,” Djanali said. “In Econ 101, you’re taught you get zero utility from paying taxes. It’s ingrained in their behavior.”
The researchers "primed" the second group by reminding them what their taxes paid for (public service, infrastructure).  The researchers come to another conclusion that seems counter-intuitive:

Some economists suggest making taxes less visible, “so the impact on your behavior is less drastic,” Djanali noted. That argument favors value-added taxes, which are incorporated into the price of an item and thus less apparent to the consumer.
“Our findings suggest that [to the contrary] it might be better to make taxes more visible – to make it really clear what people are paying for,” Djanali said.
That's the goal of earmarking, as in the social security tax.

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