Lying to Ourselves: a New Marketplace Podcast

Our latest Freakonomics Radio on Marketplace podcast is called “Lying to Ourselves.” (You can download/subscribe at iTunes, get the RSS feed, listen via the media player above, or read the transcript below.) 

The episode was inspired by a recent poll I saw on Yahoo! Finance:

Does anyone believe for a minute that this many people would actually leave the U.S. if taxes (whatever that means, exactly) were to rise to 40 percent or even 70 percent?

Yes, there is a Laffer Curve out there, somewhere. But how much are we to believe surveys like this one, or this one or this one? Remember all those people who said they’d move to Canada if George W. Bush were re-elected?

The fact is that we’ve come to rely on polls and surveys to tell us how people will behave in the future. Too bad they are almost completely unreliable!

In this episode, you’ll hear from Steve Levitt, who tells us how he’d respond to a big tax hike; Joel Weichsel from the American Automobile Association, which constantly polls people about how their driving behavior will change based on gas prices; and FiveThirtyEight.com‘s Nate Silver (author of the recent The Signal and the Noise: Why So Many Predictions Fail — But Some Don’t), talking about the reliability (or not) of election polls.

Audio Transcript

Kai RYSSDAL: Time now for a little Freakonomics Radio.  It’s that moment every couple of weeks where we talk to Stephen Dubner, the co-author of the books and blog of the same name.  It is “the hidden side of everything.” Dubner, it’s good to have you back.

Stephen J. DUBNER: Kai Ryssdal, thank you for having me back.  I know we’re all excited about the second Presidential debate last night.  Yes?

RYSSDAL: It was a good one, don’t you think?  Interesting.

DUBNER: It was.  A lot of, I thought, scintillating talk about taxation, in particular.

RYSSDAL: You need to get out more.  But OK.

DUBNER: It did get me to thinking, however, about lying. Now, I don’t mean the lying of the sort that each campaign is accusing the other of doing every two seconds. I mean, Kai, lying to ourselves.

RYSSDAL: All right, go ahead.  Because I have no idea where you’re going.

DUBNER: All right, let me explain. A couple of weeks ago, I saw a poll on Yahoo! Finance. It said that France’s wealthiest man is talking about leaving the country to avoid high taxes there.  “Would you ever leave the U.S.,” it asked, “to avoid high taxation?”  About a third of the respondents to this poll said, “no, I would never leave.”  But everyone else was willing to entertain the idea.  In fact, another third said they would leave the U.S. if taxes were to go higher than even 40 percent, which isn’t really that much of a stretch.

RYSSDAL: All right.  So I’m going to show off here.  You ready?

DUBNER: I am ready.

RYSSDAL: All right.  So this is the Laffer Curve, right?  Arthur Laffer, the economist, he said it, in theory, shows the point at which high taxes make people stop trying to work hard and make money.

DUBNER: That is the theory.  The Laffer Curve theory is a bit however like a unicorn –we don’t really know where that cutoff point is.

RYSSDAL: Come on.  Unicorns are real.

DUBNER: Sometimes.  They may be in California where you live -- I think more real than in some places.   I did ask my economist co-author Steve Levitt what he would do if, for instance, he had to pay, let’s say, 50 percent in taxes.

Steven D. LEVITT: "I wouldn’t leave the U.S.  But I definitely would work less hard.  Maybe not at 50 percent, but at 70 or 80 percent I would spend a lot more time playing golf and a lot less time trying to make money.  That’s for sure.”

RYSSDAL: Oh, please!  First of all, the man has what – four or five children?  How you gonna feed four or five kids, making less money?

DUBNER: So you don’t believe him.

RYSSDAL: Well, here’s what I think: I think he’s an economist and he sees this theory and so he’s talking to the theory.

DUBNER: I wouldn’t say you’re wrong there, but let me also say this: we lie to ourselves all the time. We’re constantly trying to predict how we’re going to behave in the future when something happens.  A tax hike.  A price change.  A Presidential election.  And we’re almost always wrong.  Take something as simple as driving. The American Automobile Association is constantly surveying drivers.  They’ll say something like, “if gas prices stay as high as they are now, or go up, will you drive less?”  And people always say, “oh, absolutely!”  And then you look at the data and they do not drive less.  Here’s Joel Weichsel with AAA:

Joel WEICHSEL: “I think there may be people who lie to themselves, or imagine that they’re doing something that they’re not.  But I think there are also people who maybe forget about things that they’ve done.  

RYSSDAL: “Forget?”  He’s being very polite and saying “we’re lying to ourselves.”  That’s what he’s saying.

DUBNER: It’s a synonym.  But I will say this: I don’t believe it’s necessarily intentional. One problem with any survey is that the power of suggestion comes into play.

RYSSDAL: All right, but let’s get it back to the debate here, Dubner and the idea of polling and people lying to themselves.  I mean, do political polls change behavior, do you think?

DUBNER: Quite possibly and we’re also getting a lot of answers that don’t reflect reality.  Think about it, what every poll relies on is one stranger telling the truth to another stranger about the future. So there are many ways in which that answer can go wrong. Nate Silver runs the blog FiveThirtyEight.com.  He takes all of these different political polls and analyzes them and weights them depending on how good a poll they are. He says it can be hard even to figure out whether a given person will vote at all.

Nate SILVER: “You can ask Americans and say, ‘are you going to vote?’  But people lie about that, just like they lie about always washing their hands or using condoms or never running a red light or anything else.”

RYSSDAL: I don’t even know what to make of this.  Is hope then lost for being able to do this kind of stuff?

DUBNER: I wouldn’t say hope is quite lost, but I will say this: the cardinal rule should be “don’t listen to what people say, watch what they do.”  So the next time you hear a friend of yours say, “oh man, if that guy gets elected President, I am out of here.  I am moving to Canada!”  You go and check back in a year or so.  I promise you the odds are pretty good he hasn’t budged an inch.

RYSSDAL: Stephen Dubner – he’ll be back in a couple of weeks.  Freakonomics.com is the web site.  We’ll see you, man, if you’re still in the country.

DUBNER: Thanks, Kai.

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  1. Badger says:

    Your body may not leave the country, but your wealth leaves. Under this perspective, the 35% response for “I’d never leave” is way too high.

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    • Michael says:

      I think the issue is income, not wealth, specifically labor income. If your body stays in the US, your labor income is going to get taxed in the US (heck even if you leave it may still be). Moving it out of the country after it’s been taxed misses the point.

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  2. Crunchyfrog says:

    I wonder if any of these people realize how hard it is to find a country willing to accept you and how much of the taxes that they’re “saving” will be spent on the bureaucratic hoops to get the paperwork allowing them to permanently reside there. And that doesn’t include being allowed to work; most countries will require that you show that you’re sufficiently wealthy to live without working or relying on their social welfare system before you’ll be given residency, or employers will have to prove that there are no citizens capable of doing a job before you can be hired.

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    • James says:

      That’s a good point about finding a country willing to accept you. The problem here (and with many of the other “lying to themselves” questions”) is that people are really responding to an unstated larger question, e.g. “Would you leave the US if there was a pleasant country with lower taxes that would let you move there, and you could pack up family, dogs, &c with no hassle?”

      As for the moving question, I’ve met quite a few people who’ve moved from California to Nevada to avoid state income taxes.

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    • Mike B says:

      There are any number of countries willing to accept high wealth individuals looking to escape taxation, however such a “service” won’t be free either and many countries that look to offer these services often have weak institutions or angry populations and in time you can quickly find all of your wealth “nationalized” at a rate of 100%.

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      • James says:

        Sure, just about anywhere will take high-wealth individuals, formally or not. But we’re not talking about them, but of the (presumably) merely prosperous folks who responded to that poll.

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  3. tmeier says:

    I’ve already responded to the tax/regulatory environment. I used to have a business, employing 10 people at good wages. It was profitable but in proportion to the hassle and worry not worth it to me so now I run one man operation making almost as much. The losers are the people I employed and the society which lost economically.

    If taxes in this country went the way of France I would definitely vote with my feet but I’m admittedly in an unusual situation.

    Well-loved. Like or Dislike: Thumb up 9 Thumb down 4
  4. Jake says:

    Beyond that, it shows that people really don’t know what their tax rates currently are. If you look at the tax brackets, federal tax is currently at 35% for the highest bracket. But, that is not the only tax we have. Add in another 6.2% for Social Security tax, and 1.45% for medicare, and double it to include the employer contribution, and you get another 15.3% on top of the base federal tax for a rate of 50.3%. Once you factor for state and local taxes, which typically add another 10% or so, you are up to a 60% rate.

    Some of you might be saying, that’s only the marginal rate for people with high income. That’s true, but lets see what happens using a more normal figure.

    The median household income in 2011 was about $49,000. Using that figure, a household could be expected to pay $8375 in federal tax (assuming no deductions for simplicity), $7497 in FICA taxes (of which their employer may pay half), and around another $4900 in state/local taxes. This sums up for a total of 42.4% in taxes.

    Why are the 32% of people who said they would leave if taxes got over 40% still here. Either they are lying to themselves, as the article suggests, or they aren’t aware of how much they are really paying in taxes.

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    • Nylund says:

      If you’re going to include the employer contribution to the numerator, you have to add it to the denominator as well.

      Here’s a simple example.

      Say I make $10 and pay $5 in taxes. Say my employer also pays $5 in taxes. There are two ways one could think of it:

      1. I pay $5 of my $10, so my tax rate is 50%.

      2. I pay $5, my employer pays $5, and I keep $5, so out of the $15, $10 are paid in taxes. That’s a rate of 66.6%.

      What you absolutely CANNOT do is claim that since I pay $5 and my employer pays $5 and my total income is $10, the tax rate is 100%. That’s obviously BS since I end up with $5 after tax, not zero.

      Yet, it’s that last method you use when you calculate your rates.

      Personally, I object to number 2 as well because it assumes that your employer would pass on any tax savings to the worker in the form of higher wages. Do you really think Walmart would give everyone a huge raise if the IRS got rid of that aspect of the payroll tax? If you think the answer is yes, you must be wearing some pretty rose-tinted glasses.

      Well-loved. Like or Dislike: Thumb up 13 Thumb down 0
      • Jake says:

        Good point on how I should have included the employer contribution. I am self-employed, so I’m just used to calculating it all straight up.

        As to the employer passing the tax savings on to the worker, it probably wouldn’t happen, since if there are employees willing to work for $X, then the company is going to pay them $X if they can get away with it. It may however lower the overhead for corporations, who will eventually have to pass some of that savings on to consumers, if the market is at all competitive.

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    • Nylund says:

      You’re also ignoring the fact that you can deduct state taxes from your federal taxes, so you’re double-counting there. And “ignoring” deductions? Come on.

      Yes, if you double-count local taxes (by not deducting them from the federal amount), add employer contributions to the numerator, but not the denominator, and ignore deductions you can indeed massage all the numbers in a way to result in a very high rate.

      The problem is, it just has little bearing to reality. It’s an utterly stupid thing to do. As it so happens, my wife actually makes just about $49,000 (nearly exactly). I can PROMISE you that her take-home income is higher than the $28.2k you think is a reasonable estimate of her after-tax income. And we don’t even have a mortgage or kids, so that doesn’t even include a child tax credit or the MID.

      You’re ignoring things, double-counting, and adding things to numerators but not denominators. It’s a totally BS made up number. That, or you’re just really terrible at understanding how taxes and math work and you actually do pay an effective tax rate over 40%. If that’s the case, you really need to hire an accountant.

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      • Jake says:

        OK, I will admit that the way I came about that number is not exactly rigorous, so I did some quick googling.

        Here is an article from the CBO on effective tax rates in 2006 (http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/100xx/doc10068/effective_tax_rates_2006.pdf) Table 1 on page 4 has a breakdown of effective tax rates paid, based on actual data.

        According to that report, the average effective federal tax rate for Americans is 41.4%

        Add in the 10.7% average state/local taxes for 2006 from this report (http://www.taxpolicycenter.org/taxfacts/Content/PDF/dqs_table_77.pdf), and you are at 52.1%. Which is in the same ballpark as my original numbers.

        Even using the numbers for just the middle quintile instead of the average, you still end up with 28.3% federally plus the state taxes leads to a 39% effective tax rate. Which is only a couple percent off from my estimate.

        The main point I was trying to get across is that many people do not consider how much they actually pay in taxes. I’m not making any comments as to whether they are too high or not. Just trying to point out what they actually are.

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      • Jake says:

        Please disregard my earlier reply. I double counted numbers in the CBO report, and probably proved your point for you that I am bad at math.

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    • Mike B says:

      It’s funny how people now equate taxes with money being flushed down the drain that they will never see again. Taxes is money paid for government SERVICES provided to all citizens and residents. Police, fire, national defense, the roads, a legal system, etc, etc. Americans (and a lot of people in Southern Europe) have deluded themselves into thinking that all of these services descend like mana from heaven and taxes are just money the corrupt government is trying to steal from them (or worse, give to poor people).

      I’d love to see how much income people would have if all the government services their taxes pay for went away. What is the annual income for someone living in log cabin trading whatever they can hunt or gather?

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      • James says:

        It’s not really funny – in the sense either of humorous or strange – because a lot of us DO think that much of the money we pay in taxes IS being flushed down the drain. In fact, we consider ourselves lucky if it’s just flushed, instead of being spent on things like the War on Drugs or Homeland Security (e.g. “police services”) which adversely affects our lives.

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      • Mike B says:

        It’s being spent on medical care for the elderly in the last 6 months of their life. Everything else is pretty much insignificant in comparison. Unfortunately keeping granny on life support is a government service that the vast majority of Americans demand.

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    • Enter your name... says:

      Another error: The money taxed at the top marginal rate is not subject to Social Security taxes. Social Security taxes stop somewhere in the middle of the 28% rate.

      The median dollar (dollar #49,000) is taxed at 25% for single people and 15% for married people… assuming, implausibly, that the household has no deductions and no dependents. The typical marginal rate for that typical household is just 10%, and that 10% is paid on very few of those 49,000 dollars. “Household income” and “taxable income” are not the same.

      You forgot to inflate the income base by the employer’s share of FICA. You can’t give 49K to the employee, minus the employee’s share of FICA, and then subtract out the employer’s share of FICA from the salary. You either give the total compensation of $52,750 and subtract both hhalves, or you give the salary of $49,000 and subtract only the employee’s half.

      Additionally, the most popular method of reaching that top tier is through unearned (non-wage/non-salary) income, none of which is subject to either Social Security or Medicare taxes. If your income is from, say, stock dividends, then you won’t pay a dime to FICA.

      In short, it’s way the heck more complicated than that, and the net result is that even a moderately well-off married couple with two kids and a mortgage often pay only ~10% of their total income in federal income taxes.

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  5. km says:

    I know this is beside the point, but leaving the country doesn’t reduce your tax bill. You’d have to renounce citizenship.

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    • Ryu Fan says:

      Actually, it is _very much_ on point. And one has to wonder what percentage of poll responders are/were aware of this. “I’ll stick it to the man by moving to Brazil! (Yet still enjoy all the benefits of US citizenship, coming and going as I please.)”

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  6. Ben says:

    I believe this is a situational hysteria thing. We are presently all ramped up on Presidential campaign hyperbole.

    Truth is, we will wake up Nov. 7 with a President that isn’t going to make major changes to the status quo, whoever wins. Accepting that defuses all the crazy.

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    • JAM says:

      I agree. I think in the short term many people have their emotions at the helm with respect to unpleasant propositions. In most cases, as time passes, the heavy lifting (opportunity costs) becomes apparent that needs to be done to support the emotional decree. The emotions get suppressed and extreme reactions turn to minor changes.

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    • tmeier says:

      It’s the direction, the slow steady erosion of liberty and inalienable rights rather than the occasional lurches but you are right in that it’s less of a government than a cultural problem. The government is only as bad as it is because we let it be. We have met the enemy and he is us.

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  7. Michael says:

    I actually did move to Canada after Bush was re-elected. In 2008, I came back (with a Canadian wife). Having Harper in charge up there made it easier to leave.

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  8. Kazzy says:

    If I’m the richest man, what do I care? I’ll make $300 million instead of $500 million? Shucks.

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