Wednesday, March 17, 2021
Zachary Liscow (Yale; Google Scholar) presents The Psychology of Taxing Capital Income: Evidence from a Survey Experiment on the Realization Rule (with Edward Fox (Michigan; Google Scholar)) virtually in California today as part of the San Diego-Davis-Hastings Tax Law Speaker Series:
The realization rule is central to income tax law, but often decreases the efficiency, equity, and simplicity of the system. Given these problems, it is surprising that we do not have a good explanation for why the rule exists for liquid assets. Scholars have long speculated about the role of the public’s views here, but little is known empirically about them. We conduct the first survey experiment to understand the psychology of taxing gains on unsold assets.
We have three main findings. First, respondents strongly prefer to wait to tax gains until sale: 75% to 25%. This lack of support persists and seems strengthened when looking across a variety of other policy framings. But the flip side is that there is surprisingly strong support for taxing assets at sale or transfer, including death, in places where current law excludes gains. Second, views barely change when participants are randomly given videos explaining the pros and cons of taxing before sale, though the pro and con treatments have large effects individually.
And, third, among many possible explanations of this psychology, we find particular evidence for three: that many respondents really wish to tax consumption, not income, in this context; that they exhibit mental accounting regarding unsold gains; and that some may tend to support the status quo.