Technology Eases the Ride to Higher Taxes

MIT economist Amy Finkelstein has found that toll roads that rely on automatic payment systems such as E-ZPass tend to charge more than those where people must pay cash. That’s not particularly surprising. As David Leonhardt notes, though,

The implications of this go well beyond highways. We increasingly live in an E-ZPass economy, in which bills are paid online, corporate cafeterias are going cashless and people take along their debit card, instead of cash, when they leave the house. Last year, 55 percent of consumer spending was done electronically, mainly with credit and debit cards, while checks accounted for less than 25 percent and cash only 20 percent, according to Visa. As recently as 2003, only 45 percent of spending was done electronically.

The E-ZPass economy is indisputably more convenient. It saves time and frustration. But the old frustrations that came with cash also brought a hidden benefit: they forced you to notice that you were spending money. With electronic money, it’s much easier to be carefree.

Marketers understand this dynamic well, which is a big reason they promote refillable gift cards and other forms of money that don’t feel like money. Part of what’s so intriguing about Ms. Finkelstein’s work is that it suggests that government officials may be coming to understand the dynamic, too.

The idea that hidden taxes — and tolls are really a kind of tax — could lead to higher taxes goes back decades. Milton Friedman famously came to regret his role in creating the withholding system for income taxes during World War II, because it eventually made people forget how much they were paying in tax. “It never occurred to me at the time,” he wrote in his autobiography, “that I was helping to develop machinery that would make possible a government that I would come to criticize severely as too large, too intrusive, too destructive of freedom.”

Even economists who don’t share Mr. Friedman’s political views agree with the larger point that how taxes are collected, and not just the underlying tax rate, matters. “We need to take seriously the possibility that people are not paying attention to the tax code,” said Raj Chetty of the University of California, Berkeley, who has been conducting some fascinating experiments on semi-hidden taxes.

Mr. Chetty argues that the complexity of today’s tax code ends up aggravating inequality. Both rich and poor families face a dizzying spectrum of tax laws, from carried-interest rules to the earned-income tax credit. But affluent families are better able to navigate the system, often by hiring an accountant. Also, the little day-to-day taxes, like highway tolls, mean a lot more to a moderate-income family.

I’ve opted for automated billing whenever possible for years and my wife and I rely on an online bill payment system for virtually everything. There’s no doubt that we’re less conscious of spending than we’d be if we had to sit down and write out several checks each month. Indeed, I couldn’t tell you offhand what my electric bill averages.

It’s a sacrifice I’m willing to make in exchange for convenience. Chetty is right, though, that little hidden taxes, especially those that offer the equivalent of a rebate for those who know the rules, are more of a burden on the little guy. As the recent story about Virginia’s “abuser tax” demonstrates, though, that’s the direction we’re headed. It’s much easier for politicians to sneak hidden taxes into bills than to hike income, property, or sales taxes.

UPDATE: University of Oregon economist Mark Thoma thinks there may be alternative explanations for disparate toll increases. Being able to whiz through toll booths decreases congestion, making the trip more pleasant, which eventually leads to more trips taken and thus more maintenance costs. Further, incremental price hikes (from, say, $1 to $1.05) are easier since there is no need to make change.

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James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College. He's a former Army officer and Desert Storm veteran. Views expressed here are his own. Follow James on Twitter @DrJJoyner.


  1. just me says:

    I totally agree that debit, credit and ezpass type systems make it feel much less like I am spending money than when I had to write a check or pay cash.

    And tax with holding absolutely changes the perception of tax payments, after all, the with holding has worked so well that people view their tax refund as almost a “gift” from the government rather than what it really is-an over payment of taxes.

  2. JKB says:

    What I find disturbing are the Visa check card commercials that recently started airing. The ones showing everything flowing like clockwork waving their card at the reader to pay. They even pan out to show all the people moving as a clock mechanism. That is until someone pulls out a checkbook or cash and it all grinds to a halt. With all eyes staring at the “kink in the works.” The subliminal message is that only problem people use cash or write a check.

    Although, I will admit that I find those who wait until their order is scanned before pulling out and slooowly writing a paper check in the grocery line annoying. That is definitely a check card transaction. On the other hand, slowing down the fast food line by using a credit or debit card is also annoying.

  3. floyd says:

    I have long advocated the elimination of escrow accounts for real estate taxes. The result would be the reduction of this tax by as much as 25% IMHO.
    Illinois has even started to allow real estate tax payments on credit card with a small “convenience fee” attached.

  4. jeff b says:

    I find the clockwork ads to be annoying because they are the opposite of reality. On planet Earth, people paying cash fly through checkout lines until some jerk pulls out a credit card. That’s when everything halts.

    People who pay at registers with checks should be sent to Guantanamo.

  5. James Joyner says:

    On planet Earth, people paying cash fly through checkout lines until some jerk pulls out a credit card. That’s when everything halts.

    That might be true if there’s an exact change requirement and fixed rates. Otherwise, people fumbling for change, clerks having to actually make change, and the like slow the process tremendously. Credit cards are swipe, sign, leave.