Dan Ariely’s new evidence that people don’t care much about taxes

Paul Solman spoke with Duke psychologist Dan Ariely about what he thinks is his most surprising research of the year.

With the end of the year approaching, it’s time to start thinking about preparing your taxes. But are you conscious of the tax rate you pay, and does it affect how hard you work? It might not make much of a difference, says Duke psychologist and behavioral economist Dan Ariely. A good friend of Making Sense, Ariely appeared in our recent story on the economic waste of Christmas gifts.

After conducting that interview, we wanted to hear more about the research Ariely’s been pursuing this year. Wednesday, we heard about his findings that monetary bonuses are poor incentives. Now, Ariely elaborates on his most surprising experiments — about taxes.
Paul Solman: What surprised you the most in the last year?

Dan Ariely: So the thing that surprised me the most in the last year was some experiments we were trying to do on taxes. Now, it’s very hard to experiment for real on taxes, so we experimented in a small way. So we would bring people to the lab and we would give them some menial tasks. They would basically see words and they had to classify whether they were real words or not real words. And we paid them tiny amounts of money for each categorization they did.

And then we changed the taxes. Some people paid no tax, some people had 25 percent tax, 50 percent tax.

Paul Solman: On what you were giving them.

Dan Ariely: On what we were giving them. And the reality was that we found no difference between their performance. No difference between how people performed on those three levels. And it still baffles me, you know, I didn’t expect people to work half as much for the 50 percent taxes, but I expected them to work less. But we found overall, though, no difference. And we’re still looking at this, but…

Paul Solman: So are you reducing the amount you are giving them, or are you taking it back from them?

Dan Ariely: Taking it back. We tried to frame it as much as possible like taxes. We’re paying you this amount, so you know what you’re getting, and we’re taking half of it back as taxes to support administration things around the lab.

So we found absolutely… I mean, virtually no difference — not even looks significant. Absolutely no difference. Here are kind of two ways to think about this. One is to say, you know, if you tax people at the higher level, they’re getting less money so they’ll be less motivated. The other way to look at it is if you want something like a new iPad, and you need $500 for it, if I tax you half, you need to work harder.

Paul Solman: Yes.

Dan Ariely: So you can think about both those things, and I’m not sure which one exactly is going on. So… but anyway, this is a puzzling result; it’s especially puzzling given the discussion that we have in policy about [how] taxes will basically get people to stop working. But we need to do much more work to try to figure this out and what are the nuances. And when are higher taxes getting people to work less and when is it actually getting people to work harder?

We’ve explored the question of how high is too high for tax rates on Making Sense before, interviewing President Ronald Reagan’s economic adviser Arthur Laffer about his famous Laffer Curve. His idea is that at a certain point, high enough tax rates will discourage workers from working, therefore diminishing the revenue the government can collect from their income. Watch the segment from 2012 below.

But tax journalist David Cay Johnston, who appears in the segment above, disagrees with Laffer’s theory, arguing that a higher tax rate would never stop him from trying to make more money. Here’s what Johnston had to say in 2012.

You know, I’m in the top 1 percent, and I’m trying to make every extra dollar I can, even though I’m at the top marginal tax rate.

I can’t imagine saying, no, I’m not going to take this opportunity to make more money because I’m going to have to pay 35 percent of it to the federal government. I mean, that’s — that’s nuts.
If it’s important to people at that level to have the same after-tax income, what are they going to do? Well, they’re going to work harder, they’re going to work smarter, they’re going to figure out how to make even more money and make their business even more successful, so they can have more money.

And if they don’t do that, the difference in their after-tax income isn’t going to matter to them and it’s not going to matter to society, except we’ll have more tax revenue to fund the things society needs to be prosperous.

This entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions

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