- [Announcer] Thank you to Policygenius for supporting PBS.
"I just love paying my taxes," said no American ever.
At best, it's a stressful mess of paperwork,
and at worst, a full blown theft by the government
of your hard earned dollars.
- Hating taxes seems to be in our cultural DNA,
and we have a history of celebrating those who defy them
from Robin Hood to the Boston Tea Party
to a certain former President
who bragged about being smart for not paying his fair share.
- Although, you could say that robbing from the rich
to feed the poor is itself a form
of aggressively progressive taxation.
- And yet, taxes are an integral part of human civilization.
For 5,000 years, they've been the necessary price
of a functioning society,
and if you itemized all the things you get
in exchange for your tax dollars,
the vast majority of people would probably opt
to take that deal than go without those benefits.
That's not to say there haven't been unfair
or oppressive tax systems,
but at this point, we should admit that Ben Franklin
was right when he said that taxation
is inescapable as death.
So why can't we accept that?
Why all the hate?
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- Let's try a thought experiment.
Say your town decides to revamp its public parking system.
They remove all the parking meters
and replace them with sensors
that can identify the owner of a car.
They let everyone park wherever they want
whenever they want,
and then, at the end of the year,
you get a bill for all the parking you did.
- Even though this sounds easier than the previous system,
there's a good chance,
according to some behavioral economists,
that it would start to make people very angry.
That's because they'd grow accustomed
to parking being free
and start to perceive the year end bill
as an intrusive penalty.
When you disconnect the cost from the benefit,
the benefit gets taken for granted
and the cost can start feeling more like a loss,
and humans hate loss.
- It's called loss aversion,
and it's a big part of why we hate paying taxes.
Every time you get a paycheck,
your pay stub reminds you how much of it you lost
before it even got into your hands.
A bimonthly sting of primal anxiety.
Someone's taking my stuff!
And yet, there's very little benefit awareness
to balance that out.
How often do you drive down the highway thinking,
look at my tax dollars at work?
When you call 911,
you don't credit the IRS for their role
in getting a firetruck to your door.
When we sit down to dinner,
we don't thank the FDA
for making sure there's no poison in it.
In a 2008 poll by Cornell,
57% of respondents said that they had never participated
in a social program, even though, almost all of them had.
Taxes pay for so many things that we rely on everyday.
There's no way we could mentally keep track of them all,
and as a result, taxes can often feel
less like a transaction and more like getting ripped off.
- Loss aversion doesn't just mean we hate losses,
but that we hate them more than we like gains.
This is very true at tax time.
A study found that people who owed money to the IRS
were more likely to cheat on their taxes
than those who were due for a rebate.
In other words, we're more likely to break the law
to save a buck than to make a buck.
The difference between how much Americans owe in taxes
and how much they voluntarily pay is known as the tax gap,
and it's estimated to be around $406 billion a year.
The majority of tax evasion is committed by people
who pay their taxes at the end of the year,
like investors, business owners and independent contractors
rather than those who have had it withheld
from their paychecks.
- Our national hatred of taxes does have an upside.
The government can use the tax code
to subtly encourage positive social behavior,
commonly called nudges.
Charitable deductions nudge people to be generous.
Mortgage deductions nudge people to be homeowners.
Conversely, tax penalties
can discourage undesirable behavior
like smoking or pollution,
but this unfortunately can reinforce
the perception of taxes as a punishment
rather than a transaction or a social obligation.
Why should I be punished?
The thinking goes for doing exactly
what our capitalist system encourages us to do, make money.
- These nudges called tax expenditures
have been shown to be effective
at influencing human behavior,
but as well meaning as they might be,
they also tend to benefit the wealthy and corporations
because they're the ones who have the time and resources
to investigate all the little tricks
that can save you a buck.
They also make the U.S. tax code complicated,
very complicated.
- According to the IRS,
it takes the average American about 11 hours
to file their taxes.
It's hard to convey to our international viewers
how difficult and confusing filling out
all those forms can be
while knowing that any mistake you make
can land you in hot water with the Feds.
So it's not surprising that many people, myself included,
opt to pay someone else to do it.
Americans spend roughly $10 billion a year
on professional tax preparers
and another two billion on tax preparation software.
In time and money,
it's estimated that the tax filing system costs the U.S.
between 140 and $215 billion a year.
- And the weird thing is it doesn't have to be this way.
For most Americans, everything you send to the IRS,
they already about you.
They receive all the same forms
that your employer and bank send to you,
and as long as you're not itemizing deductions,
they don't technically need you to do the homework
like some kind of sadistic math teacher
who will send you to prison for a wrong answer.
- The U.S. is one of the only wealthy countries
that puts its citizens through this annual stress test.
In countries like the Netherlands, Sweden, Japan,
the process only takes minutes.
The government sends you a card
with all the calculations already done.
You can check the math if you want,
otherwise, just sign it and send it back.
- That's it?
- That's it.
- Well, who wouldn't want that?
- Well, the tax preparers, for one.
As we mentioned before,
it's a billion dollar industry
and they rely on taxes to be such a headache
that no one would want to do it themselves.
They've spent a lot of money lobbying against legislation
that would simplify the filing process,
and they even persuaded the IRS not to offer
its own free filing service.
- Another group that prefers things this way
is anti-tax activists.
If your mission is to persuade people that taxes are bad,
it helps if they associate them with negative emotions
like frustration and fear.
As Ronald Reagan famously put it, "Taxes should hurt."
The last thing they want is for Americans
to have a more pleasant relationship with the IRS.
- And we should.
Aside from the headache of filing,
we don't have it so bad,
at least compared to other countries.
According to the Tax Policy Center,
U.S. tax revenue equaled 24% of gross domestic product.
Well below the 34% weighted average
for other OECD countries.
Only Chile, Ireland and Mexico were lower on that list.
Americans seem to be in the paradoxical situation
of having some of the lowest taxes in the world,
but the most angst about them.
- But there is a bright side.
Despite our hangups,
Americans are actually really good about paying their taxes.
Our voluntary compliance rate, a fancy way of saying
how many people pay their taxes honestly and on time
is higher than most industrialized nations.
Surveys find that the vast majority of Americans
across the political spectrum see tax paying
as a patriotic civic duty.
In fact, the only thing that seems to shake our faith
in the system is the suspicion
that others aren't paying their fair share.
Why should I sweat over all these forms
when rich people and corporations are cheating?
- That's why many behavioral economists believe
that the two best ways
to improve America's contentious relationship with taxes
would be making it easier for ordinary people to file
and closing the loopholes
that make the game feel rigged against them.
- After all, the IRS is another government agency
that's funded by your taxes.
They serve you by keeping the nation's lights on,
so to speak.
We don't have to think of them as the Boogeyman,
but as the friendly neighborhood paycheck shrinker.
- Maybe that's too optimistic.
- Yeah.
- [Presenters] And that's our Two Cents.
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If you want a clearer picture of what you're buying
with your taxes, check out our video:
How Do Your Tax Dollars Get Spent?
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