Voters generally, and prosperous voters in particular, suffer from what I call the mother of all cognitive illusions: they believe that having to pay higher taxes would make it more difficult to buy what they want. Like many illusory beliefs, this one may seem self-evident. And yet, as I will explain, it is completely baseless.
Many prosperous voters are of course willing to be taxed more heavily to support the common good. But that doesn’t mean they regard taxes as painless. For most of these voters, the perceived value of additional public investment trumps their reluctance to endure what they imagine will be unpleasant reductions in disposable income.
Far more numerous, however, are prosperous voters who hold the opposite view: their perceived benefits from additional public investment are insufficient to compensate for the personal sacrifices they believe higher taxes would entail. And so they resist tax increases with all the formidable levers at their disposal.
Regardless of where they stand on tax policy, then, most prosperous voters believe that higher taxes would necessitate unpleasant reductions in personal consumption spending.
I call this belief the mother of all cognitive illusions because it has caused more damage than any other illusion yet identified by behavioral scientists. It has prevented us from raising the revenue required to deal with the many pressing challenges we face—decaying infrastructure, runaway income inequality, and, most important, the climate crisis. The harm it has caused to date pales in comparison with the future damage it threatens.
The mother of all cognitive illusions: the belief that having to pay higher taxes would make it more difficult to buy what you want.
Cognitive illusions are best understood as a consequence of how design constraints shape the brain’s ability to process information. Life is complicated. We are bombarded by terabytes of information each day, far more than we are able to process consciously. To cope, our nervous systems employ various heuristics. These rules of thumb often operate completely out of conscious awareness. They work reasonably well much of the time. But they are imperfect.
In the diagram below, which square is darker, A or B? If you think A looks darker, your eyes and brain are functioning normally. But in this instance, your judgment is incorrect. In what’s called the checker-shadow illusion, square A is exactly the same shade of gray as square B. Look at the figure carefully. If your brain is like mine, it should be telling you, “That can’t be true!” And yet it is.
The psychologist Richard Wiseman offers this explanation:
Your eyes and brain see that the two squares are the same shade of gray, but then think, ‘Hold on—if a square in a shadow reflects the same amount of light as a square outside of the shadow, then in reality [square B] must be a much lighter shade of gray.’ As a result, your brain alters your perception of the image so that you see what it thinks is out there in the real world.
That explanation, plausible though it sounds, is insufficient to convince most people. But now study the amended image below, and note the complete lack of contrast between squares A and B and the added strip that joins them. Only upon seeing this second image was I able even to consider the possibility that A and B might actually be the same shade of gray.
As the checker-shadow illusion dramatically illustrates, a statement that seems incontrovertibly true (“Square A is darker than square B.”) may in fact be false. This example should affirm at least the possibility that the self-evidently true belief that higher taxes require painful sacrifices could be false as well.
When someone asks, “How will higher taxes affect me?” the natural first step is to try to recall the effects of similar events in the past. When high-income people try to imagine the impact of higher taxes, Plan A is to summon memories of how they felt in the wake of past tax increases. But that strategy doesn’t work in the current era, since most high-income people alive today have experienced steadily declining tax rates. In World War II, the top marginal tax rate in the United States was 92 percent. By 1966, when I graduated from Georgia Tech, it had fallen to 70 percent. In 1982 it was 50 percent, and it is now just 37 percent. Apart from brief and isolated increases almost too small to notice, top marginal tax rates have fallen steadily since their World War II peak. Similar declines have occurred in other countries.
I call this belief the mother of all cognitive illusions because it has caused more damage than any other illusion yet identified by behavioral scientists.
When Plan A fails, we go to Plan B. Because paying higher taxes means having less money to spend on other things, a plausible alternative cognitive strategy is to estimate the effect of tax hikes by recalling earlier events that resulted in lower disposable income—an occasional business reverse, for example, or a losing lawsuit, or a divorce, or a house fire, maybe even a health crisis. Rare is the life history that is completely devoid of events like these, which share a common attribute: they make people feel miserable.
More important, such events share a second feature, one that is absent from an increase in taxes: they reduce our own incomes while leaving others’ incomes unaffected. Higher taxes, in contrast, reduce all incomes in tandem. This difference holds the key to understanding the mother of all cognitive illusions.
As most prosperous people would themselves be quick to concede, they have everything anybody might reasonably be said to need. If higher taxes pose any threat, it would be to make it more difficult for them to buy life’s special extras. But “special” is an inescapably relative concept. To be special means to stand out in some way from what is expected. And almost without exception, special things are in limited supply. There are only so many penthouse apartments with sweeping views of Central Park, for instance. To get one, a wealthy person must outbid peers who also want it. The outcomes of such bidding contests depend almost exclusively on relative purchasing power. And since relative purchasing power is completely unaffected when the wealthy all pay higher taxes, the same penthouses end up in the same hands as before.
In World War II, the top marginal tax rate in the United States was 92 percent. By 1966 it had fallen to 70 percent. In 1982 it was 50 percent, and it is now just 37 percent.
A plausible objection is that higher tax rates on prosperous Americans would put them at a disadvantage relative to oligarchs from other countries in the bidding wars for trophy properties in the United States. But that disadvantage could be eliminated easily by the imposition of a purchase levy on nonresident buyers.
The following simple thought experiment encapsulates my central point that even the wealthy would benefit from greater spending on public investment.
Imagine two independent worlds, in one of which the wealthy are taxed more heavily than in the other. In the high-tax world, the wealthiest drivers buy Porsche 911 Turbos for $150,000 rather than $333,000 Ferrari F12 Berlinettas, the vehicle of choice of wealthy drivers in the low-tax world. But because the lowly Porsche includes every design feature that materially affects handling and performance, the absolute differences between these cars are minuscule. In both cases, drivers would take the same pride in owning the best car on the road. Available evidence suggests that if all other features of the two worlds were exactly the same, it would be difficult to detect any measurable happiness differences between wealthy drivers in these environments.
But of course other features would not be the same. Even if governments in both worlds were highly wasteful, at least some of the extra revenue in the high-tax world would go for public investment, including better road maintenance. So the real question is this: “Who is happier, someone who drives a $333,000 Ferrari on roads riddled with foot-deep potholes, or someone driving a $150,000 Porsche on well-maintained roads?”
“Who is happier, someone who drives a $333,000 Ferrari on roads riddled with foot-deep potholes, or someone driving a $150,000 Porsche on well-maintained roads?”
It’s an uninteresting question. No serious driver would prefer the Ferrari on bad roads.
The mother of all cognitive illusions implies that societies can enjoy the fruits of additional public investment without having to demand painful sacrifices from anyone. If that strikes you as a radical claim, that’s because it is. Yet the claim follows logically from only one simple premise—that beyond some point (one that has long since been passed in the West), across-the-board increases in most forms of private consumption do little more than raise the bar that defines what people consider adequate.
This premise is perhaps the least controversial finding from many decades of careful research on the determinants of human well-being. Those who insist that higher taxes on the wealthy require painful sacrifices face a formidable hurdle: to sustain their position they must refute the validity of a large body of carefully gathered evidence.
Although it’s little wonder that people would believe that higher taxes would make them feel bad, this is a cognitive error, pure and simple. And because of the magnitude of the resulting losses, I do not exaggerate in the slightest by calling it the mother of all cognitive illusions.
Excerpted from Under the Influence: Putting Peer Pressure to Work. Copyright (c) 2020 by Robert Frank. Used with permission of the publisher, Princeton University Press. All rights reserved.