In an essay called Foundations of the Kling School, I write,
Economics should be subsumed under the general study of human behavior, not the other way around.
…The conceptual differences between leaving a tip and paying income taxes are not as large as they might first appear. If tipping were under the aegis of complex bureaucratic regulations and income taxes were based on citizens following the custom as they best see fit, we might resent the former more than the latter. As it stands today, tipping is much less unpleasant, because you do not have to fill out complicated forms. But if we were to become convinced by a Stiglitzian demonstration that tipping requires regulation, then you can be certain that in order to calculate our obligatory tip, government would force us to fill out forms detailing how well the waiter explained the menu, whether the food was served sufficiently hot, and so on.
Although a libertarian would argue that the government obtains tax revenues at gunpoint, the fact is that most people pay their taxes willingly. In fact, I can imagine a government being entirely supported by voluntary contributions, in which citizens make their payments on the basis of habits, beliefs, and values.
You may need to read the entire essay to get the context.
READER COMMENTS
Jack P
Mar 15 2007 at 8:37am
Seems people indeed do not evade taxes as often as they ”could”…
Why do people pay taxes?
James Alm, Gary H. McClelland and William D. Schulze
Journal of Public Economics
Volume 48, Issue 1 , June 1992, Pages 21-38
Abstract
Why do people pay taxes when they have an opportunity, even an incentive, to evade? The experimental results in this paper suggest that tax compliance occurs because some individuals overweight the low probability of audit, although such overweighting is not universal. The results also indicate that compliance does not occur simply because individuals believe that evasion is wrong, since subject behavior is unchanged by the use of either neutral or loaded terms. Finally, there is evidence that individuals pay taxes because they value the public goods that their taxes finance. In short, individuals exhibit much diversity in their behavior.
Dave Eaton
Mar 15 2007 at 8:47am
I am neither young nor an economist, but find myself influenced by your writing about economics. I endorse the name Klingon for members of the Kling school of economics.
I suspect that this is not original, and I’m sure it isn’t all that clever. Still, I will henceforth hear all of your columns as if they were being spoken my Michael Dorn, which I find makes them even more enjoyable and enlightening.
Scott Clark
Mar 15 2007 at 9:34am
AK, I understand your point about force of habit causing people to pay taxes. But that habit was partly formed out of fear of the lawman and what he/she will do if they catch you cheating, so I think the gunpoint metaphor still holds some water.
You yourself explain an aspect of government as a rugby scrum. Who would voluntarily throw their money into the middle of a rugby scrum? You’d have no idea who would end up with the money or what they would want to use it for. In the scrum, physical strength, agility, and flexibility will get you the ball, in the political scrum it is rhetorical strength and ideological agility, and moral flexibility that end up ruling the day, and that can quickly spiral out of any bounds originally construed.
Actually, I kind of like the rugby metaphor, after the scrum, one player has the ball (representing power and money and influence) which he passes off to people on the same team while the rest of the field is looking for any opportunity to viciously tackle the cr-p out of the ball carrier, if they can hit them from a blindside, they like that even better.
jp
Mar 15 2007 at 12:58pm
Arnold — One of your best essays ever. Thanks for making it available.
In addition to the hat as a metaphor for our rational utility-maximizing selves, I would suggest a collar. All of our other selves can act freely only up to a point. If our charitable self or passionate self or self-indulgent self tries to go too far, our rational utility-maximizing collar will limit what that other self may do. The collar is always there, but within certain confines the other selves can be given freedom.
Matt
Mar 15 2007 at 1:19pm
Good start Arnold. Keep it up.
MattC
Mar 15 2007 at 2:31pm
The process of changing people’s habits may include government policy changes that affect their incentives, but the government policy changes themselves may be more a result than a cause of broader social evolution.
I’ve felt for sometime that if libertarians and conservatives want to privatize education and charity, they should do it themselves. Take your children out of public school and help build a bigger system of private education. Volunteer with churches or help fund or create new charities that help the poor. If you are successful, I bet that many Americans will discover those government programs are unnecessary and superfluous.
Michael E Sullivan
Mar 15 2007 at 3:13pm
My thinking has evolved in the direction of trying to influence people’s habits. I have become persuaded that the American habit to “form associations” that de Tocqueville found is central to America’s success. The ability of individuals to co-operate effectively outside of the framework of an extended family, clan, or tribe is what separates successful societies from those that are economically and politically impoverished. This view is articulated at greater length in What Causes Prosperity?, where I speculated on the role of ethics in leading to economic growth.
You certainly aren’t the first to say this, but this is a nice succinct statement of an important idea, of the commercial power of trust. This is *why* a strong rule of law is good for wealth creation.
A key insight I had while reading some threads on overcoming bias about war is this: Lack of trust implies huge transaction costs. The idea on the threads over there is that economically, war should almost never happen. Even in the rare case when it is clearly in the economic interest of A to start a war with B, there should always exist a better deal for both sides (modulo transaction costs) involving B paying A some concession not to start the war.
But when you have a lack of trust on the order of our current administration vs. islamic states today, the transaction costs are astronomical, because neither side believes the other is likely to do what it agrees to do.
This isn’t a transaction cost so much as an uncertain expectation, but it has similar disastrous effects.
In the smaller realm, lack of trust has similar effects that drastically limit trade in the absence of a shared ethical or legal framework that people trust will be adhered to most of the time. The legal framework alone is not enough. If I expected that 50% of my customers would fail to pay me until I took them to court and I could not reliably predict which ones, I’d have to charge nearly twice my current prices to make the same money (since most of the time, going to court and winning is only a small net positive), and I might even need to charge *more* than twice to balance the extra financial risk involved.
But that’s exactly the kind of situation that people with no trust tend to be in. In our society we trust that most people, even random strangers are 99% likely to live up to their word, or at least close. They may try to nickel and dime you or get extra service or complain about nothing, but only very rarely do they do the moral equivalent of “dine and dash”. And yet, there is not always a rational economic reason for that on the individual level.
N.
Mar 15 2007 at 4:42pm
If we shouldn’t liken government to a ‘parent’ or an ‘institution’ what word should we use to best describe it?
I’m looking for a serious answer here; I think the point is salient.
Matthew C
Mar 15 2007 at 5:23pm
I think you are the most original mind in economics today, Arnold.
Great essay.
Arnold Kling
Mar 15 2007 at 6:57pm
I do think of government as an institution.
Another way to think of government is as a convention. People think of it as the last resort to peacefully resolve disputes. Once government has resolved a dispute, the loser has to go along. I’ll elaborate on this latter view in a subsequent essay.
PrestoPundit
Mar 16 2007 at 12:07am
You have the topic of economics wrong.
Economics explains a problem raised by order in our experience — the overall order of the global market economy. It uses the construction of a _logic_ and an everyday understanding of human planning and learning in the context of prices to explain that order. (Economics also explains disorders within this order — e.g. created by price controls on housing, money, etc.)
So economics isn’t the “study” of human behavior — this was a mistake introduced by Ludwig Mises and Lionel Robbins, in their attempt to make sense of economics as a science. They didn’t get foundations of the field right — and sent the profession on a multi-generational wild goose chase.
You are quite right that Hayek rejected and attacked “home economicus” — Hayek saw man as both a plan & logic following being, and as a rule following being (very similar to Wittgenstein).
See for example Vol. 1 of _Law, Legislation and Liberty_.
Richard Schweitzer
Mar 16 2007 at 7:20pm
Since you seem to have different “thoughts” (concepts?) of governments, do you ever consider that they are simply mechanisms? Or does your understanding of “institutions” in social orders differ from that of, say, Douglas North, et al.?
Richard Schweitzer
Mar 16 2007 at 7:46pm
On a separate point:
Where PrestoPundit (in proscribing the field) says; ” Economics explains a problem raised by order in our experience . . .” [emphasis added]
What field of examination explains a problem raised by chaos in our experience?[emphasis provided]
John T. Kennedy
Mar 18 2007 at 11:43pm
“Although a libertarian would argue that the government obtains tax revenues at gunpoint, the fact is that most people pay their taxes willingly.”
Give everyone the option of paying no taxes with no personal penalty and I think you’ll quickly find out just how wrong that is.
How much would you pay in taxes this year if you were free to pay nothing?
“In fact, I can imagine a government being entirely supported by voluntary contributions, in which citizens make their payments on the basis of habits, beliefs, and values.”
Why would that be a government? How would it differ from a private enterprise?
cnjones
Mar 19 2007 at 10:19pm
I’m no economist but I have waited tables and have found that there is a wide range of tippers, those that tip too little or not at all, those that give you just exactly the right amount and not a penny more, and those that give above and beyond what they should. It’s because of this wide range that I think this idea of letting people pay their own taxes would probably work because in the end it would equal it self out. The downside being that a lot of people would get out of paying what they owe. Since this happens now anyway I don’t see how it would make any difference. It’s just like with stealing: because people steal from businesses consumers make up for it by paying more at the register. For those of you that tip your 15% (which is what your suppose to tip for those of you that don’t know) or go above that it makes up the difference for the low and no tippers.
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