Tuesday, December 8, 2015

Psychology and Taxes

This post was adapted from my reply to a Reddit thread about taxes.
"People pay taxes because if they don't they go to prison, no one pays taxes out of solidarity and if they did they would be pretty stupid."
"There is a reason why every country has laws against tax evasion. If there wasn't, do you really think anyone would pay?"
Ok, so it's obvious that lots of people would choose not to pay taxes if there was no consequence for it. There are people who steal too, and I'm sure if it were legal, they'd steal more.

But honestly these comments break my heart a little. Our society is now so fragmented, with capitalism/selfishness so thoroughly established as the default mode of thought and people thoroughly disenfranchised and disillusioned with the government, some people can't even imagine contributing to society as something anyone would do voluntarily, or rationally.

How and when is it rational to voluntarily pay taxes? Well, unfortunately when we're talking about national taxes, there are such huge numbers involved, the system tends to be hard to empathize with. (On which more later).

So let's think about a smaller scale situation. Imagine I live in a small village of 100 people, and there's a maintenance team who collect money from the other villagers to help maintain the roads, trim the hedges, plant flowerbeds, etc.

If everyone contributes, everyone gets these benefits at a fair price.

If I refuse to contribute, the team still have 99% of the money, which is probably good enough - so effectively, I get all these benefits for free! That's pretty great for me.

But what if everyone realizes this? If enough people refuse to contribute, there won't be enough money to cover the maintenance costs, which means potholes in the roads don't get fixed, hedges and weeds grow out of control, and everyone suffers.


This is very similar to a situation from game theory, called "the prisoners' dilemma". Police use it in real life to get criminals to accuse each other. It works like this...

A pair of brothers are suspected of a murder, and are being interrogated in separate rooms. The police have enough evidence to convict them both of petty theft, but they really want evidence about the murder. So the interrogator offers them each a deal: either we arrest you for the theft, or you accuse your brother of murder right now. If you do that, you're free to go.
And shortly after, the interrogator adds more pressure: your brother already ratted you out! You're going down, but we'll take it a bit easier on you if you implicate him too.

Suppose I'm the criminal considering my options. I don't know whether my brother has really ratted me out. If he did, my best move is to accuse him back so they'll take it easy on me. And if he didn't, my best move is to accuse him, and walk away a free man.

In other words, regardless of what he's doing, my best move is always to accuse him. And yet, if we can just keep silent, the police have no evidence to pin the murder on us - we'll both be out in a couple of months!

That's the core paradox of the prisoner's dilemma. We get the best overall outcome if everyone cooperates... But an individual can always improve his personal situation by not cooperating. And yet, if enough people follow this logic and don't cooperate, the result is the worst possible outcome for everyone.

In other words: if everyone acts only in self interest, they all lose!

Since this situation comes up so often in cooperative situations, and humans have evolved to be cooperative animals, we actually have developed instincts to stop us hitting the "all lose" outcome. How do we do it? The simplest answer is to change the payoffs so that it no longer functions as a prisoners' dilemma. For example, if I know that my mother will kill me if I accuse my brother of murder, suddenly my decision becomes much simpler. Would I rather go to jail, or die?

Every human society exhibits a distaste for people who act selfishly to get an advantage over other people. We call it "fairness" or "justice", and it's how our species puts a thumb on the scales of the prisoners' dilemma. It's not quite as powerful as the threat of my mother killing me, but it does affect our decision making in a similar way.

So that's what's going on in the village. If everyone pays their maintenance fees, they can all have a nice village. And it shouldn't be too hard to persuade everyone to chip in, thanks to our sense of fairness.


Unfortunately, our species also evolved to live in small tribes that were hostile to each other - which means we find it very easy to divide the world into what psychologists call an "ingroup" (people we identify with) and "outgroup" (anyone else). The ingroup is typically seen as diverse, trustworthy, "real people", whereas the outgroup are faceless, interchangeable, untrustworthy, and generally "not real people". This simple principle is at the heart of patriotism, racism, religious factionalism, and just about every war humans have ever fought.

When it comes to working with an outgroup, humans have no instinct for fairness. Quite the opposite.

So how does this relate to taxes?

Well, national taxes are basically the same as the village's maintenance fund... except that now the village has a million times more people. In a group that large, human cooperative instincts break down; it's very hard to think of millions of strangers as part of our ingroup.

So in that situation, we can easily lose track of the idea that we're cooperating for our mutual benefit, and instead slip into a mindset where the government is "The Man" - a hostile force taking our money, to be resented, and outwitted when possible.

How do we avoid hitting the "all lose" outcome of the prisoners' dilemma in this new, more hostile situation? We change the payoffs in a different way: If people will no longer cooperate just because it's the fair thing to do, we add in a credible threat that they'll be caught and fined if they don't.

So in conclusion - Is it rational to voluntarily pay taxes? Yes. Is that an assessment that human brains are naturally bad at? Unfortunately, yes.