The Tax Man Nudgeth (Ep. 121)

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

The U.S. tax code is almost universally seen as onerous and overly complicated. There is always talk in Washington about serious reform — Michigan Reps. Dave Camp (R.) and Sander Levin (D.) are currently working on it — but, Washington being Washington, we probably shouldn’t hold our breath.

So in this podcast we decided to take a look at the tax code we’re stuck with for now and see if there are some improvements, however marginal, that are worth thinking about. We start by discussing the “tax gap,” the huge portion of taxes that simply go uncollected for a variety of reasons. We once wrote about a clever man who helped close the gap a bit. In this episode, former White House economist Austan Goolsbee tells us why the government doesn’t try too hard to collect tax on all the cash that sloshes around the economy.

You’ll also hear from Dan Ariely, who has an idea for turning the act of paying taxes into a somewhat more satisfying civic duty.

And we learn how a tiny British Government unit, the Behavioral Insights Team, is using the latest academic findings in behavioral economics and psychology to nudge British taxpayers toward compliance. The B.I.T. is informally called the “Nudge Unit,” after the excellent book Nudge by Richard Thaler and Cass Sunstein. Thaler regularly consults for the unit; Sunstein, who recently exited government service here in the U.S., has just written a related book called Simpler: The Future of Government.

In the podcast, you’ll hear from the Nudge Unit’s director, David Halpern, a noted social scientist himself and the author of an excellent book called The Hidden Wealth of Nations. While the Marketplace segment only had room for a couple of clips of our Halpern interview, this podcast includes an extended cut of him talking about a number of other, non-tax measures. I hope you find it as interesting as I did.


we should have an automated tax system, where the gov't computes/executes the taxes for u, so the majority of taxpayers doesn't have to go thru the rigamarole- the only downside would be that hr block goes belly up- but that's just a matter of time due to quicken...


@frankenduf: Well, that's a nice idea, but HR Block and Quicken would oppose that simplification. There was a recent report from Propublica showing that Intuit (maker of TurboTax) has spent millions preventing the US government from creating online automated systems to help people file taxes. Any simplification of the tax system will be opposed by the businesses that gain from a complicated tax system.

If you'd like to see some of this propaganda paid for by Intuit:

"The Stop IRS Takeover Campaign is fighting to stop the massive expansion of the U.S. government through a big government program called “Simple Return,” “Return Free” or “Ready Return.” Advocated by the White House and soon to be introduced to Congress, a “Simple Return” system will give power to the IRS to not only collect your taxes, but also prepare your taxes – “for free” – and send you the bill."

They're positioning any simplication or online tax preparation as "big government takeover".



While the automatic return might work for people who just have income from wages, I can't see it becoming practical for a lot of us. Even assuming the IRS could track my spending, how could it determine whether each purchase is a business expense (thus deductable on my Schedule C, or how much of the money I spend at Home Depot can be deducted on Form 8829 (Business Use of Home)?

The other half of the question is why all those wage-only taxpayers think it's so darned complicated to fill in a 1040-EZ or 1040-A.

Seminymous Coward

Perhaps it's considered hard because my 1040A was accompanied by 3-4 schedules, forms, riders, or whatever. Alternatively, it could be that the penalty for a wrong answer to any of the questions can be huge financial penalties, a tactical entry by IRS-CI, or a felony conviction. I think the core, though, is the tortured definitions of seemingly plain terms.

Also, as a practical matter for someone who is not an expert in the process, you need to fill out a 1040 to see if you should submit it, a 1040A, or a 1040EZ, since otherwise you risk paying more tax than required.


Great podcast as usual. I totally agree with having taxpayers determine which departments receive their tax dollars at both the state and federal level. I live in Arizona and there are state tax credits for schools and working poor. If you donate a certain amount ($200 for individuals, $400 for married couples) to a qualified organization, you get a credit that offsets your income tax (link to website for tax credit for working poor - Since I feel that Arizona is doing a very poor job of providing funds for education and the working poor, the last few years I have directed almost all of my income tax to both a public school and a non-profit organization that provides support for the working poor. It has actually made me feel good about paying my taxes because I know where my tax dollars are going. Perhaps the model in Arizona could be studied to understand the impact and whether is would be beneficial to roll out similar programs out to other states and the federal level.


Enter your name...

I do this mentally most years. If a government agency or person does a great job, then I tell myself that supporting that action is what my money paid for this year. It doesn't have any practical effect (and it won't, in the long run, because they'll be able to guess how much people will 'donate' to which agencies, and reduce their normal budget to account for it), but it's definitely satisfying.

Once, I witnessed an Air Force officer driving two hours away to pick up a woman whose car broke down on a family trip while her husband was deployed. He fixed the car on the side of the highway and made sure she got home safely. I immediately "earmarked" my tax dollars for his salary that year.


Hi Stephen, the podcast was interesting, but I was expecting a little more... a real solution that would make the audience think, remember and react. If the government wants to close the tax gap, then, they will have to seriously look into eliminating the income taxes and replacing them with sales and luxury taxes.

It would be interesting if you could do anther podcast about the sales and luxury taxes. I'd like to hear what Steven Levitt has to say about it.

Chris Burke

I read an ebook a couple of years ago entitled If I Were King that promotes a progressive consumption tax in lieu of income and payroll taxes. The basis of the tax is that the more a product or service costs the higher the tax rate. This would eliminate the inherent regressive aspect of either a flat income tax or a standard value added tax and would address the wealth gap and not just the income gap that is a pall over the economy. The book also suggests a similar tax for the corporate world as well.

Caleb B

As a former waiter, every person in my restaurant claimed 11% in tips. The credit cards were automatic, so you had to claim 100% of credit cards, but you'd adjust your cash tips so you always came out at 11%. My manager said it was because if the restaurant's report said 10% or lower, it would trip a trigger and they'd get audited.

I've always wondered if the IRS was ever curious why no waiter in America made more than 15% in a year.


> "I’ve always wondered if the IRS was ever curious why no waiter in America made more than 15% in a year."

I'd bet that the IRS knows that waiters are under reporting their tips. The problem probably has more to do with figuring out what the real number is and the difficulty of cracking down on people who probably aren't earning that much money to begin with (i.e. blood from a stone).


Another area of lost income and potential tax to the IRS is in the rule that says if an independent contractor makes less than $600 the reporting business does not have to file a Form 1099-MISC with the IRS. The onus is now on the independent contractor to claim the income - or not. If you add up all the income that falls below the threshold of $600 I bet there is a fair amount of coin there. Sort of like the fraudster that figured out if every bank transaction included $0.o1 for his personal account he could be rich. He made millions.


The concept of the "tax gap" presupposes that taxation is legally and more importantly morally valid. There is a debate on whether federal income tax is valid on the grounds that the 16th Amendment was never properly ratified. Also, since the government interferes with private transactions, one could say that taxation is equal to theft and therefore immoral. The only way to make taxation moral is to make it optional. That would at least solve the problem of the "tax gap." :)

Chris Jansen

As an American living abroad, I've come to appreciate not tipping. People are paid fair wages so I don't have to subsidize them. This would eliminate a large cash intake and potential unreported income.