TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Tuesday, September 24, 2013

McCaffery: Behavioral Economics and Tax Law

L&EEdward McCaffery (USC), Behavioral Economics and the Law: Tax, in Oxford Handbook of Behavioral Law & Economics (Doron Teichman & Eyal Zamir, eds.) (2014):

This chapter argues that a behavioral law and economics approach to tax is deeply needed for a wider normative analysis of the impacts of law on social welfare. The absence of traditional markets to serve as arbitrage mechanisms in public finance means that suboptimal tax and fiscal systems can arise and persist for long periods of time. Most of the current scholarly applications of behavioral approaches to tax, however, fail to take into account the institutional settings in which tax laws exist. The common recommendation for tax-favored savings plans to counteract a persistent individual-level myopia that leads to under-savings for many suffers from the possibility of being undercut on account of the ability to borrow tax-free under the current income tax system, combined with...individual-level myopia. Similarly, a recent trend of scholarship that argues for “low salient” taxes to help ameliorate persistent fiscal crises (themselves exacerbated by pervasive behavioral biases playing out in a setting absent effective arbitrage mechanisms) ignores or underplays the real costs of even hidden taxes, both allocatively and distributionally. The chapter concludes that the most critical work for a behavioral law and economics approach to tax lies ahead.

Scholarship, Tax | Permalink


When Gorgias lionized behavioral persuasion of rhetoricians, Socrates noted that the persuaders, really

“flatterers having no regard for men's highest interests, is ever making pleasure the bait of the unwary, and deceiving them into the belief that she is of the highest value to them.”

Indeed they do. Evangelical behavioral economists flatter policymakers (and themselves) that the highest value is a moral, good helmsmen to steer (or nudge) a flawed electorate. In this view, all other people are mere devices for the efficient production of social utility. But what if men’s “highest interest” is integrity: autonomy to formulate, pursue, and attain personal goals; strength from exercise of personal responsibility, surmounting obstacles, and resisting misfortune; the slow accumulation and ownership of experience, prudence and wisdom; and the transmission of all that to descendants. What if that is anesthetized or lost to flattery about desirable social outcomes?

That’s a speculative criticism of course, but the persuader’s own assumptions seem iffy:

1. Tax legislation is a scalpel meant to cut out embedded human proclivities, cancers of bad judgment, like “myopic” consumption/saving patterns, not a neutral revenue raiser.
2. The tax scalpel should be handed to legislators under the tutelage of (law and) behavioral economics faculty (LBEF).
3. Legislators hear, understand and agree with LBEF over the call of polling and campaign donors.
4. LBEF are master augurers of bad behavior, expert gastromancers of utterances by bored undergraduates (paid like Delphic oracles in cookies and $50 stipends), learned craniognomancers peering at magnetic resonance images of the ratio of oxygenated to deoxygenated hemoglobin.
5. And, as Prof. McCaffery, notes that institutional incentives can be toxic disablers of the would be surgeons.

Posted by: Yo Gabba Gabba | Sep 24, 2013 2:52:46 PM

So-called "behavioral approaches to tax" must not include deception. Tricks like phase-outs and add-ons hide the true marginal rate from taxpayers so that they won't respond by reducing their work effort.

Deception is not optimal. It carries a heavy cost in lost legitimacy of the tax system. Economists don't yet know how to account for that cost, but it's real.

Posted by: AMT buff | Sep 25, 2013 7:58:05 AM