Behavioural Economics and Complex Decision-Making Implications for the Australian Tax and Transfer System
Very interesting paper and some key points on behavioral finance & taxes…
(H/T Richard Johnson & Geary Behavior for sending this in…)
Key Points (Via Reeson & Dunstall CSIRO)
Many aspects of observed human decision-making differ from the ‘rational’ behaviour assumed in economic models. For example:
People are much more concerned about possible losses than possible gains
People are inclined to stick with the status quo
People dislike uncertainty
People value fairness
People sharply discount the future compared to the present
For all but the simplest of decisions, people generally do not attempt to find the optimal solution, but rather apply simple decision-making strategies:They stick with what they know
They follow others
They settle for something that is good enough, rather than searching for the best
The more complex the decision, the less well equipped people are to deal with it. As a result, people often make decisions which do not appear to be in their best interests:They procrastinate, putting off things such as saving for retirement
They stick with the default option, even if it is not the best
If a decision is too complex they may avoid it altogether
People are readily confused, and prone to misleading advice
These issues tend to be particularly prevalent among the least well-off.
In the case of the Australian tax system:Most individual taxpayers use a tax agent, though it is costly to do so
A large number of people fail to complete a tax return, even if they are entitled to a tax refund
Welfare payments delivered through the tax system, such as the superannuation co-contribution, are likely to be missed by those who stand to benefit most
There is an opportunity to apply insights from behavioural economics, facilitated by advances in information technology and service delivery, to remove the burden of complexity from most individual taxpayers:Send people pre-filled tax forms. This would represent a default tax return, and those who accept it could avoid the expense of a tax agent
Those with more complex affairs may still add additional information, and/or consult a tax agent
This approach can achieve significant behavioural change at minimal cost, and reduce inequities in access to services and entitlements. This report reviews academic studies from economics, psychology and service delivery which provide the theoretical and empirical basis for these observations.
