First I should say that I did mix up exemption with deduction in my response, but that my credit example is even more on point as a credit is closer in effect to a surcharge than an exemption.
That said, I agree that the OP is a trick question that only works when you limit the lower end of the income scale. The redefining the baseline thing only works if you assume that only certain incomes and tax burdens are possible. In actuality, incomes can go all the way down to zero and always will. His numbers need to include that:
First Baseline of Tax Burden, No Children
Poor Man: 1,000
Rich Woman: 20,000 Really poor man: 0
First Baseline of Tax Burden, Minus Exemptions for Kiddies.
Poor Man: 1,000 - 500 = 500
Rich Woman: 20,000 - 200 = 19,800 Really Poor Man: 0-0=0
Updated Baseline of Tax Burden, With Children
Poor Man: 500
Rich Woman: 19,800 Really Poor Man: 0
Updated Baseline of Tax Burden, With No Kids Penalty
Poor Man: 500 + 500 = 1,000
Rich Woman: 19,800 + 200 = 20,000 Really Poor Man: 0+500=500
Now with the more accurate tax credit instead of exemption, nothing changes except that the Really Poor Man would have -500 tax burden and the switch would cost him 1000 dollars instead of 500.
I suppose you could “change your baseline” to include a 500 tax burden for someone with no income at all. Or have some bizare sliding scale that starts off a zero, peaks at some low income and then shrinks again as you go higher.
The problem with this analogy is that the default for taxes isn’t zero taxes. In fact, the tax code is so insanely complex that nobody really knows what their default is. There is no natural default for how much taxes you owe. To the extent that the default number of children to have is zero (something I disagree with, incidentally), that’s a failure of the analogy, not of the principle.
No, the default is the percentage of my income based on the marginal rate. Let’s say I’m in the 15% bracket. That is the default rate. And the default number of children is zero.
We can say that the default rate is 4% and the default number of children are 10, but that doesn’t make it so. If we made those assumptions, we would have to change other assumptions like home size, schooling costs, pediatric hospital beds, attitudes toward child care, working conditions (because, after all, if the government said that the “default” number of children a person had was 10…or even 2, then you would have to make labor provisions for that).
And to take the health care analogy, I can’t pretend that the default rate is 16% but get a 1% health insurance “credit” by having a policy. I could think of it that way, but I would be wrong. Hell, I could say that the default rate was 100%, and I’m getting an 85% credit for health insurance! Yay, President Obama! He gave me an 85% tax credit!!! It sounds so 1984ish regarding the chocolate ration.
Long story short. The real default situation matters.
ETA: I know there are other deductions, but 15% is the default. The deductions are adjustments to the default.
In what way does the “default” in a default-based presentation of income tax obligations matter? If you were just given a table describing every possible personal situation and the corresponding taxes owed for that personal situation, how would you determine the default? What does it matter if one is selected to call “default”?
And, if the following isn’t for you the same as the question “what does it matter,” I’d also like to hear what difference you think it would make to select this or that value as the “default”.
Yet it can still be done. He would, I think, advocate being able to do this with simple examples regardless of the best practical way to write the real code.
Well, I don’t actually know about Schelling, but Kahneman’s book (which I adapted the OP from) is chock full of psychologically tricky questions, beginning to end. Readers are advised to stay on their toes. None of the questions are too technically difficult, but nearly all of them are deliberately designed to work against a human cognitive bias. I tried to set up my OP in a similar way, just because it’s an entertaining format. The first post has two spoiler boxes, the problem is actually split into two separate posts, and I explicitly request, twice, that people compare their instinctive answer with a more carefully considered answer. Obviously, a more carefully considered answer is desired.
Just about the only thing I didn’t do was put in a big red bold-font disclaimer saying that it was a tricky question. Obviously, something is going on under the surface. Even then, though, getting it wrong the first time is no big deal. (Even given the repeated lessons of the original question, I still almost got it wrong.)
It’s only when people persist in error, when they can’t get it right over time, when they refuse to change their framing at all, that I believe there is a problem.
Let me start with a money example, since it’ll be easier to explain, and then work back to the OP in an analogy.
I would walk into an intro econ lesson holding a one dollar bill and a pair of scissors. I’d ask how much the banknote was worth. I’d then threaten to cut a corner off the bill. “What if I do this? Would it be worth 99 cents?” Well, no. It’d still be worth the full value. I’d then talk about the current price of gold. If I were to take a one troy ounce coin, clip off a section, and take it to a coin shop to sell it, would the coin be worth the full price? (I never actually bought a Kruggerrand and clipped a chunk out, but if I were ever to teach frosh econ again, I’d totally do something like that.)
The point to all of this, of course, is abstraction. The banknote is a concrete object, a tangible thing, yet there is something fundamentally different between the tangible green slip of paper and the abstract notion of “one dollar”. Part of the paper could theoretically be cut away, while having no effect on the essence of dollarness. The same isn’t true for a gold coin. Take out a chunk and the coin is automatically worth less. I’ve found this is a great way to ease students into the notion that there is something very strange going on here. Money is not a concrete thing, but an idea. Naturally, abstractions like this are powerful.
The law is not concrete reality. It’s an abstraction, an idea. But ideas have the power to reshape the world.
And I want to emphasize strongly here: Lots of people have trouble with this. They can’t handle working with ideas as ideas. A lot of the gold worship in the world comes from this very problem. (A good movie example of this is the mountain of money in a warehouse in The Dark Knight. Nolan wants to get across the notion of some mob banks hiding their wealth. How do they hide it? Ha! They take a bunch of paper and they stick it somewhere. The huge pile of green makes for more compelling cinema than a series of difficult-to-follow ledger entries which end with a bank in the Caymans. To get across the idea of that much money visually, on the screen, he has to make it concrete, something the Joker can slide down. Great movie.)
Anyone who can’t detach from the tangible, who can’t approach money as an idea and only an idea, will simply never understand the economy. Utterly impossible. Now, I could list about twenty thousand other things that people need to know if they want to have an informed opinion about monetary policy, but I start with something very simple, very small, very limited in scope. My OP is very limited in scope. It’s like the problem some elementary age students have with numbers. They can count concrete objects, like apples. They can add and subtract stuff they can hold in their hands. “If I have five apples, and you give me three apples, then I’d have eight apples.” No problem there. But for some of them, if you take away the apples and leave only the numbers – if you deprive them of the concrete reality and leave only the abstraction – they can’t do it. Something like 5 + 3 is more than they can handle, because they’re always wondering “five what?”
What prompted this very thread, as I alluded to in the OP but didn’t explicitly say, were other discussions where a different frame for thinking about taxation was being offered, and then summarily rejected by others. They seemed to reject the frame not for legitimate philosophical reasons but because they simply didn’t understand it. At least by my reading. They persisted in the misunderstanding even after multiple careful explanations. They seemed constitutionally incapable of taking even a single step outside the standard frame.
I wasn’t part of these discussions, but they reminded me of Kahneman’s explanation of framing. On the chance I was misunderstanding them, I thought it would be safer, and cleaner, to start on this idea from scratch. Rather than using the tax example from the other threads, I wanted to make a broader, more general, more abstract point. So I borrowed the Nobel laurate’s tax example. And that’s it.
The point is, simply, that the law is an abstraction, and therefore it can be represented equally well in countless logically arbitrary ways. Psychologically arbitrary? No. But although I do want to talk about tax law, I wanted this discussion to be extremely narrow in scope, a very specific subset of tax law, to wit, to take the abstraction of tax law and remain inside that abstraction to see the underlying nature of the thing, rather than looking at practical effects. What’s fascinating is how difficult it is for some people to think about nonstandard definitions of an abstract system like the law, when it has such huge real-world impact.
This is not a mandate of: “Get this right the first time or your opinions are totally useless!” Not at all. I think the most admirable behavior that’s been shown in this thread so far has been a poster like 2sense saying, “Wait a sec, I don’t (yet!) understand what’s going on, but I really want to learn!”
Can we learn to disentangle the normal practical consequences from the underlying abstraction? Can we demonstrate that we can look past logical superficialities, especially if those superficialities have strong practical reasons for existing? Ignoring surface appearance to concentrate on abstract form can be stupidly easily when there’s nothing at stake, when our emotions don’t play a role. It’s only when we have a topic of overwhelming real-world significance that it can be such a difficult exercise to see if we can look past the surface. And I would say this difficulty is exactly why it’s such an important skill.
I’m talking about tax law, yes, but only the abstract form of it precisely because it’s so difficult a topic to talk about – as this very thread has so gorgeously demonstrated. Just as I can think of about twenty thousand deeper things a person needs to know to have a worthwhile opinion on monetary policy, I’m sure you can personally think of twenty thousand deeper things a person needs to know about before having a worthwhile opinion on the federal budget. But just as the economic opinion of a person who can’t let go of shiny metal is worthless, I think it’s absolutely essentially, as a first step, for people to be able to let go of the standard baseline in tax law. I want people to be able to think about what the tax code might look like if the default was owning an electric vehicle. Ridiculous? For the practical task of writing the real code, sure. But I wouldn’t remotely trust the opinion of anyone who couldn’t do it.
I should say again that I could have been misreading the posters in the other thread, which is why I didn’t name them. But when reading some of their posts, I couldn’t help but imagine an elementary school student, stymied by a math problem with the apples removed and only the abstraction remaining.
An important skill, I’d say. That’s still true even if most of us here can pat ourselves on the back for getting it right.
Hellestal: upon further reflection, I think our main point of disagreement is that you see the two questions in the OP as having profound implications on how people think about problems, and I see the questions as a run-of-the-mill parlor trick. I also have no idea why that dollar vs gold question is important. I think most people understand that by high school, at the very latest.
When I read that you want the discussion to remain inside the limited scope of how the questions are framed, that seems to me to be like telling someone that they aren’t allowed to attack the “where did the other dollar go” puzzle in any other way than that framed in the riddle. How profound can the point be if it is so fragile as to fall apart under unexpected scrutiny?
The other threads on the ACA, though, seem to show, just as Hallestaal is claiming, that some people sometimes continue to react to the framing more directly than to the underlying mathematical realities, even when the distinction has been clearly explained, and even though it’s the math that determines who will get how much money, not the framing. This does appear to be fundamentally irrational. I don’t know if you want to call this “profound” but it’s not nothing…
Presumably, the issue is in all the debates over whether it’s a tax or a fine or whatnot (and perhaps whether it’s a penalty for the uninsured or a tax benefit for the insured), none of which make any difference in terms of the money people owe in any particular situation.
But that’s not a question of values, fairness, math, or revenues. That’s a matter of the Constitution and the limited powers of government. Whether one sees the IRS glass of revenues as being half filled or half empty is irrelevant: the question was whether Congress was exercising a constitutional power when it created the law.
As I see it, here’s the central question, prefaced by the premises:
An exemption and a penalty are functionally equivalent–the “parlor trick” of the OP.
Exemptions based on behavior are Constitutional.
We don’t know whether penalties based on behavior are Constitutional.
Question: Is a penalty based on behavior automatically Constitutional, since it’s exactly equivalent to an exemption based on behavior?
There are, I think, two ways to answer this question in the negative:
There’s the claim that the exact language of the statute matters, that it’s not simply the effect of the statute that determines its constitutionality. I find this argument totally hollow, but folks make it.
That an exemption and a penalty are not functionally equivalent.
It’s this second objection to the constitutionality of the mandate that the OP addresses.
Let’s just call default “what it is now.” As you said, there’s nothing magic about a 15% rate anymore than a 10% or 25% rate. But 15% is what we are used to. You can’t make it 17% and say, “Well, gee it could have been 25%, so just pretend you got a cut.”
Since this thread talks about child tax credits, we would look at how that was instituted. Let’s say the tax rate was 15% and the government then decided to give a $1k per child tax credit. That is truly a credit for people who have children. If you have a child, you pay less. If you don’t have a child, you aren’t paying any more than you used to so it would be absurd to say you are being “penalized” or “taxed” for not having children, and would be like the coupon example mentioned earlier in the thread.
However, if along with the $1k per child tax credit, the government also raised income taxes across the board by $1k, then it would rightly be seen as a penalty for not having children. People with children would be paying the same rate, and those without children would pay more.
You could say to the childless people in this scenario to pretend that income taxes were really raised $2k across the board and that they are $1k richer, but it makes no sense. The change from the norm is what matters, even if that norm was arbitrary to begin with.
“What it is now” gets changed by the law. Do you believe that whether the change goes up or down affects the constitutionality of a change to the tax code?
Personally, yes. According to the Supreme Court, no. That’s why when they abandoned the idea that it is only a tax if it’s sole purpose is to raise revenue they have led us to the type of absurd result that makes a tax and a penalty synonymous.
I object constitutionally because it allows the federal government to regulate beyond their enumerated powers simply by structuring a penalty as a tax.
Why does the direction of a change to the tax code (that is, whether amount paid increases or decreases) affect its constitutionality? What if some people have to pay more and other people have to pay less; how does that affect constitutionality?
But it sounds like you think they could already do so, could put in place precisely the same regulations beyond their enumerate powers, simply by raising taxes a bit and then restructuring that penalty instead as an exemption for people who don’t qualify for the penalty. Everyone would end up paying exactly the same amount of taxes as under the unconstitutional version, the same “regulations beyond their enumerate powers” would be put in place, the only difference would be the wording. And you think that difference would make it constitutional?