Florack and Sheffrin (2013) on Psychology and Taxes

Nicole E. Florack and Steven M. Sheffrin, “Psychological Non-Equivalence of Tax Bases: An Empirical Investigation.” Proceedings of the 106th National Tax Association, November 2013; available at SSRN: http://ssrn.com/abstract=2376990.

• Identical tax schedules can be framed either as wage taxes or as consumption taxes. Florack and Sheffrin ask if the framing will influence decision making, as well as preferences for one frame as opposed to the other. 

• They use an internet survey to ask about: (1) the willingness to take a second job and (2) the willingness to alter prospective retirement age and current consumption in the face of higher future taxes. 

• The authors find that the framing matters quite a bit. Wage taxes undermine the willingness to take on a second job to a greater extent than do equivalent consumption taxes. This asymmetry remains (actually, is amplified) even after the equivalence of the two tax schemes carefully is explained to the survey respondents. 

• Retirement ages are more likely to be raised when wage taxes increase as opposed to when (equivalent) consumption taxes increase; the two tax frames also differentially affect the time path of pre- and post-retirement consumption. 

• Though the two frames produce identical effects on budget sets, the longer respondents considered the issue (with respect to the second job scenario), the less likely they were to favor the wage tax framing. In the early going, the wage tax framing was more popular than the consumption tax framing. After the explanation of equivalence, the spending frame is more popular, but oddly, only about one-third of the respondents view the equivalent tax frames as, well, equivalent. The spending frame is more popular with respect to retirement decisions, too. 

• The authors suggest that tax salience is driving some of the results. In particular, when deciding whether to take a second job, a wage tax seems more salient, more relevant, somehow, than a consumption tax – and hence the wage tax deters more people from taking a second job. 

• The (eventual) preference for the consumption tax might be related to a sense of control: perhaps respondents think that they can avoid a consumption tax through increased saving. This view, within the framework of the model, is illusory, but perhaps not so illusory for similar taxes in the real world. The notion of self-administration of taxes (via spending decisions) is a related control-like feature.