Sunday, January 24, 2010

Framing tax policies

That taxes incite passions and fears of big government among conservatives and generates instinctive opposition in politicians is well known. I have blogged earlier about how it is possible to collect the same amounts more easily without generating the same opposition, by either minimizing the salience of the tax or by re-designating the tax as a user fee or by promising to use the proceeds of the fee in some specific and tangible, preferably local, activities.

Economix points to an article by Bradford Plumer in the New Republic which draws attention to a new study by David J. Hardisty, Eric J. Johnson, and Elke U. Weber of Columbia University that finds substantial impact of framing in the way taxes are perceived and received.

"Test subjects were broken up into two groups, and each group was allowed to pick between pricier and cheaper versions of various items like airline tickets. Group A was told that the more expensive items included the price of a 'carbon tax', whose proceeds would go toward clean-energy development. Group B was told that the costlier items included the price of a 'carbon offset', whose proceeds would go toward clean-energy development. Exact same policy, just different names for each.

You can guess what happened next. In the 'offset' group, Democrats, Republicans and independents all flocked toward the pricier item. They were perfectly happy to pay an extra surcharge to fund CO2 reduction — even Republicans gushed about the benefits of doing so. Not only that, but most of the group supported making the surcharge mandatory. In the 'tax' group, however, Democrats were the only ones willing to pay for the costlier item. Republicans in this group were much more inclined to grumble about how much more expensive the tax made things. Labels really do matter."

It is in this context that the Obama administration has preferred to call its bank tax proposals as a "fee". It is also a compelling enough reason to frame any carbon emission tax as an "offset fee" so as to pre-empt the predictable anti-tax opposition.

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