Thursday, October 29, 2009

Salience and Taxes

Are taxes distortionary when they're higher, or just when we think about them more. This paper by Amy Finkelstein of MIT (HT: Ian Ayres) seems to suggest that it's not the rate, but the "salience" (i.e. how much we think about taxes) that drive us crazy. It explains that using irrational numbers to calculate taxes might keep us from getting to wrapped around the axle over them. This might explain why small business owners are more crazed about taxes than others since they have to file and pay taxes using quarterly estimated tax forms instead of filing once at the end of the year. This year I had some weird "additional tax" thrown on by the state of VA (which has a really complicated filing) and had to spend over a month of phone calls and correspondence trying to get an explanation of what was going on with it. For some reason they claimed that I was supposed to have been filing estimated tax forms because the withholding was too low, which is nuts.
Anyway, I don't mind taxes. I think if I knew what I was paying and knew what I was left with at the end, and had to think less about "this part goes to tax" I probably wouldn't mind the taxes so much, and it wouldn't mess with my consumption choices as much. This is one thing that's always puzzled me about sales taxes here in the US. Why can't they just be included in the price? Why does something priced at a dollar have to come out to $1.06 or something?
This is also probably why we don't think too much about tariffs on imports. We never see how it impacts the prices, so we almost just assume that we're not really "paying" any of the burden (which of course is patently false). This might mean that the consumption distortions from trade restrictions are not as high, but it might mean that the production distortions are even higher.

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