Intro
In this episode of Freakonomics, the team explores how to make people hate taxes a little bit less. They explore the concept of voluntary giving, the psychology behind charitable donations, and the potential for allowing taxpayers to allocate their tax dollars to specific causes. They also delve into the Hometown Tax program in Japan and its success in incentivizing local production and sales. Join the conversation on how to increase tax compliance and improve citizens’ relationship with the government.
Main Takeaways
Voluntary Giving and Altruism
- People will give money to the government voluntarily if they support what the government is doing.
- The dictator game experiment showed that people are generally altruistic, at least a little bit.
- Altruism goes up when there’s more of a reason to give the money away.
- People are more likely to donate to a charity than to an anonymous person down the hall.
- It’s unclear whether people would donate to the government for the same reasons as they give to charity.
Donations and Tax Compliance
- People donate to charities with a mission they like, but paying taxes is different because it’s not easy to know how tax dollars will be spent and the government may spend money on things people don’t like.
- People would give almost as much to a government organization as they would to a private organization if they could donate for a specific purpose, such as disaster relief.
- Americans donate nearly half a trillion dollars each year to charities, which is just a little bit more than the amount of unpaid taxes owed to the federal government.
- Giving to charities may not be a measure of pure altruism, but rather due to social pressure, ego boost, warm glow, or tax break.
- Creating a market mechanism where citizens can choose how their taxes will be used and receive a small gift in return for their tax donation could increase tax compliance.
Tax Evasion and Compliance
- Tax evasion is a significant issue, with an estimated 16% of federal taxes not being remitted.
- Noncompliance rates are lower for employees with wages and salaries (1%) due to automatic tax withholding.
- Self-employment income has a noncompliance rate of over 60% due to the lack of third-party reporting.
- Under-reported income from self-employment, business partnerships, and investments account for 80% of the nearly half-trillion-dollar tax gap.
- Tax evasion is not the same as tax avoidance, with the latter being legal ways to reduce taxes.
Historical Examples and International Perspectives
- Tax avoidance and evasion have been around for centuries, with examples dating back to ancient Egypt and 17th century England.
- In England, a tax was levied based on the number of windows a house had, leading to creative workarounds such as bricking up windows and installing windows that served two rooms.
- The bachelor tax, which was levied on unmarried men, led to a market for “professional lady rejectors” who would fill out forms stating that a man had proposed to them and been rejected, thus exempting them from the tax.
- Wealth taxes have been tried in several European countries, but with limited success due to avoidance and evasion by the wealthy.
- Japan’s economy balances economic freedom, equity, and growth producing fantastic outcomes for citizens.
The Hometown Tax Program in Japan
- The Hometown Tax program in Japan allows citizens to direct their taxes to any region in the country, not just their own hometown.
- The program creates a market mechanism where citizens can choose which regional products they want to buy, creating competition amongst different villages and regions.
- In exchange for their donation, citizens receive a gift or catalog of approved products from the region they directed their taxes to.
- The program has been successful, with donations totaling over $6 billion USD in 2021.
- One criticism of the program is that it disproportionately benefits higher income households due to the maximum tax donation being partly based on income. However, charitable giving in Japan is not as prominent as in the United States, making the Hometown Tax system the most direct and frequently used part of tax deductibility available.
Summary
Voluntary Giving and Altruism
People are generally altruistic and willing to give money to the government if they support its mission. Altruism increases when there’s a clear reason to give, such as supporting a charity with a mission they like. However, it’s uncertain whether people would donate to the government for the same reasons as they give to charity.
Donations and Tax Compliance
Americans donate a substantial amount of money to charities each year, indicating a willingness to give. However, giving to charities may not solely be driven by pure altruism but also by social pressure, ego boost, warm glow, or tax breaks. Creating a market mechanism where taxpayers can choose how their taxes will be used and receive a small gift in return could increase tax compliance.
Tax Evasion and Compliance
Tax evasion is a significant issue, with a substantial portion of federal taxes going unpaid. Noncompliance rates vary depending on income sources, with self-employment income having a particularly high noncompliance rate. Under-reported income from various sources contributes to the significant tax gap. It’s essential to distinguish between tax evasion and tax avoidance, with the latter being legal ways to reduce taxes.
Historical Examples and International Perspectives
Tax avoidance and evasion have a long history, dating back centuries. Examples from ancient Egypt and 17th century England demonstrate creative ways people have avoided taxes. Wealth taxes have been attempted in Europe but faced challenges due to avoidance and evasion. Japan’s economy provides an interesting perspective, with a balance between economic freedom, equity, and growth.
The Hometown Tax Program in Japan
The Hometown Tax program in Japan allows taxpayers to direct their taxes to any region in the country, fostering competition among different regions. In return for their donation, taxpayers receive gifts or catalogs of approved products from the region they supported. The program has been successful, generating billions of dollars in donations. However, there are concerns about the program disproportionately benefiting higher-income households.
Conclusion
Increasing tax compliance and improving citizens’ relationship with the government require innovative approaches. Voluntary giving, market mechanisms, and increased awareness of government actions can play a significant role in achieving these goals. By understanding the psychology behind charitable donations and learning from successful programs like the Hometown Tax system in Japan, it’s possible to create a tax system that people hate a little bit less.
