A Tax, by Any Other Name

Posted by Cliff Kuang

Let's rethink taxes so people feel good about chipping in.

A carbon cap and trade program sounds great in theory. By giving companies allotments for carbon emissions, which they could then trade, you'd create a market for green innovation. Companies would have incentives to slash carbon, since they could sell those savings to heavy polluters as credits. Conversely, heavy polluters would have to pay to keep operating as usual-also giving them an incentive to cut carbon.But many people think it's a bad idea. They argue that cap-and-trade is both complex to administer and easy to abuse-Europe's scheme, for example, has plenty of critics. Better to simply tax carbon emissions, the thinking goes-it'll be simpler to implement, and create incentives for efficiency.Too bad it'll never happen. For politicians, raising taxes is the equivalent of playing Russia Roulette with a fully loaded gun. Cap-and-trade schemes persist exactly for that reason-a carbon tax would never pass in the Senate.But we can design our way around that problem. As the New York Times Magazine recently reported, behavioral economists have found that simply describing an idea as an "offset" rather than a "tax" makes Republicans much more likely to accept its merits. That study took place in a lab, though. In the real world, filled with Fox News and Rush Limbaugh, a tax by any other name is still a tax. (Cap-and-trade is, you guessed it, being labeled a tax.)They've been able to vilify taxes so easily in part because there's so little innovation in tax policy design. Using the lessons of behavioral economics, couldn't one counter them by designing a tax policy that makes people rethink their interactions with the government?For example, we could put a tax on carbon, and let business choose among several options for how that money will be spent, whether it's solar power, tidal generators, reforestation, or even returning the money to average citizens. If people know exactly where their money goes, they're less likely to resent a tax-ahem, offset. That'll give them an ownership stake in those programs, and provide them with something to market. (A business could boast that "In 2010, we invested $100 billion in new carbon technologies.")Behavioral economists are producing an ever-expanding body of research on these elective tax systems and their relative appeal. "When you give people a specific objective, it makes new ideas much more palatable," explains Dan Ariely, author of the excellent book, Predictably Irrational. (You can buy the new, revised version of the book here.) It's called the victim effect: People don't give money to vague causes like starvation. But if that same cause has a face attached to it-such as a particular starving child in a particular village-fund-raising is far more likely to succeed. Carbon "offsets" tied to specific causes that payers can choose would take on a similar dynamic. "Governments tend not to get the taxes right because their design makes the whole dynamic negative," says Ariely. "But you can make things interesting and bring taxes to the center of civic life."We don't have that today. Taxes are a burden, to be cheated through clever accounting or lambasted by politicians eager for an easy slam-dunk. If we're going to change that culture, we've got to create ways for people to feel invested in the system. That's going to require a creative approach to tax policy design that respects human psychology.