Most people have strong opinions when it comes to taxes. But a study in the February issue of Psychology, Public Policy, and Law (Vol. 12, No. 1) suggests that when faced with specific tax-policy questions, people often make cognitive errors that lead them to endorse policies at odds with their own stated preferences.
These cognitive errors stem from something called the isolation effect, says study author Jonathan Baron, PhD, of the University of Pennsylvania. When making complicated decisions, people tend to focus on the most obvious pieces of information and ignore other relevant facts.
In the first experiment in the Web-based study, Baron and co-author Edward McCaffery, PhD, of the University of Southern California, asked participants what amount of tax citizens should pay on incomes of $25,000, $50,000, $100,000 or $200,000. When the researchers asked participants to respond in percentages, the participants on average showed a strong preference for a progressive tax system-one in which the rich pay a higher percentage of their income than the poor. But when they asked those same participants to give their answers in dollars, the participants outlined a system that was closer to a flat tax across all income brackets. Most likely, the researchers say, that's because even a flat tax system seems progressive when expressed in dollars, because the rich are still paying more.
"Basically what we've shown is that people are internally inconsistent," says Baron. The most obvious piece of information-that the rich were contributing more money to the system than the poor-overshadowed the fact that rich and poor were contributing equal percentages of their incomes.
In another experiment, the researchers found that most participants wanted their tax system to be three things: marriage neutral, meaning that if two people marry and both keep the same income, their tax bracket doesn't change; couples-neutral, meaning that married couples with the same total income pay the same tax, regardless of how much each person contributes; and graduated, meaning individuals or couples with higher incomes pay higher taxes.
But it's logically impossible for a tax system to be all three of these things at the same time, notes Baron. For example, when a dual-earner couple gets married in a marriage-neutral system, their tax bracket won't go up because their individual incomes haven't changed. But if the system is couples-neutral, then their tax bracket will have to go up, because their combined income will put them in the same bracket as a couple with the same income in which only one partner works.
These cognitive errors are important, Baron says, because almost everyone is subject to them-including the policy-makers who craft tax laws and the public whose opinions on taxes help shape tax policy.
"What we can expect, then, is that public policies will be distorted because of these biases," Baron says. "We end up with the most psychologically appealing but not the best tax system."