If Taxes Hurt Less, Would They Be Higher?

Jean-Baptiste Colbert. Image via Wikipedia

My latest column on Money & Your Mind over at SmartMoney.com. In this week’s column, I look at everyone’s favorite topic: taxes. Specifically, I ask: Should we be greatful that taxes are complicated and difficult to pay?

From the piece, which focuses on an interesting study of EZ-Pass, which showed that easier toll payment led to higher toll rates:

About taxation, Louis XIV’s finance minister, Jean-Baptiste Colbert, once said that the art is in “so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing.” As April 15 approaches, you the taxpayer may indeed feel like hissing. Taxes are so painfully complex that roughly 60% of Americans pay someone else to prepare their returns, at a cost of hundreds of billions of dollars per year. Still others rely on computer software. The rest pay in headaches and tears.

But as you contemplate this annual toll in tears and treasure, it’s worth reflecting: Is the pain, perhaps, worth it? Is it a needless annoyance, or is it a needed reminder of the cost of government? Is the pain, in other words, one of the few things saving you from being plucked bare and converted into a down comforter?

The question of whether it should be easy or hard for people to pay their taxes is, to an extent most people don’t realize, an ideological one. Dating back to John Stuart Mill’s 1848 Principles of Political Economy, there has been an understanding that a less visible tax system may have a tendency to fuel the growth of government. The less the goose feels the plucking, after all, the more feathers the pluckers can collect.

…Does this mean we shouldn’t expand the expand the idea of EZ-Pass to create an “EZ-Tax” system, where the government would use the data it already has on us to fill out our tax forms — as countries such as Denmark, Belgium, Chile, Portugal, Spain, and France are trying — leaving us to simply sign and send money?

It depends on our priorities. If our priority is to experience as little pain from taxes as possible, we could go down the road California is on with its ReadyReturn program, available to people with income only from wages and only one employer. From the 60,000 people who used it to file prefilled returns in the 2008 tax year, it got Saddam Hussein levels of support: 99% said they’d use it again.

If our goal is to hold onto a little more of our money, though, remember: Swearing’s been shown to alleviate pain. So, bear down, swear away, and don’t get plucked any more than absolutely necessary.

What I didn’t have time to go into in the piece was just how much we know about what’s called the fiscal illusion — the idea that the less people feel/see the taxes they’re being charged, the less they’ll resist higher taxes… and thus the more they’ll be taxed and the more government will grow.

We know, for instance, that the complexity of a state’s tax structure is related to its having higher taxes. We know that a locality having a lot of renters leads to pressure for bigger government, because renters aren’t as aware of how tax costs get passed on to them as homeowners are. We know that when the government funds its spending with public debt the taxpayers are shielded from feeling the full cost of government, and thus they let it grow. All of these things, though, could be mere correlation, not causation — though, the trends are suggestive. The EZ-Pass study I write about in the piece, however, gets us a little closer to proving the causation: Easier to pay tolls equals higher tolls; and the toll increases are suddenly less responsive to the election calendar.

And, so, I think low-tax types like Grover Norquist have a pretty decent empirical foundation from which to argue that we shouldn’t make paying taxes any easier — let alone the incentive problems with a system where the IRS would be preparing your taxes. There’s a reason President Obama wants tax simplicity and Republicans don’t. There’s a reason California’s trying pre-filled tax returns and Arizona isn’t.

Another Republican idea, however, is largely discredited by what we know about tax pain and tax rates: Starve the Beast (the idea that cutting taxes will force the government to shrink). As Bill Niskanen argues here [PDF], GOP tax cuts seem only to have fueled the growth of government by luring the American people into believing that government can give us a lot of services for a little money — when, in fact, we’re just borrowing up to our eyeballs. The best way to make people want smaller government may be to let them pay for it and to let them know they’re paying for it.

In other words, let them do a little hissing.

• Read the EZ-Pass study here [PDF].

• Read the empirical analysis of the fiscal illusion (you know you want to) here [PDF].

• Neuroworld looked at the 2010 death tax experiment here.

• Neuroworld looked at why we pay our taxes here.