By Bryan Caplan
Suppose an economist tells you about an obscure tax loophole: You can reduce your taxes without going to jail. You’ve never taken advantage of it because you’ve never even heard about it. But when you investigate his factual claims, they seem to check out. The people who’ve carefully studied the issue broadly agree with him. How should you react?
a. Say “If people were rational, they’d already be taking advantage of this loophole. Since they’re not taking advantage of it, the opportunity is illusory.”
b. Say “Your argument assumes that people want more money. Some of us like paying taxes.”
c. Say “This loophole is only useful for middle and upper class people who itemize their deductions and have the mental flexibility to revise their tax returns. How many people is that?”
d. Say “Good to know. Even if I can’t use this loophole right now, it may come in handy later on.”
When an economist points out a tax loophole, (d) seems like the most sensible reaction by a wide margin. (a) absurdly equates rationality with omniscience. (b) treats a very common desire like an eccentric quirk. (c) dismisses vast numbers of people as a minor footnote – and ignores option value.
OK, now suppose an economist points out a parenting loophole: You can make fewer sacrifices without hurting your kids. Once again, the people who’ve carefully studied the issue broadly agree
with him. Tell me: Why are people so reluctant to simply affirm (d)? Why are they so quick to say (a), (b), or (c)? Why?