Tax Policy and User Experience

Let me start with the following: everything I understand about User Experience I learned from my wife, and anywhere I fall short here likely is due to me not listening enough or understanding fully the point she was making. That is now out of the way.

Economic policy makers give inadequate attention to user experience when formulating their policy. Sometimes this manifests itself in the “unanticipated effects” of policy, or maybe just policy outcomes falling short of expectations. There are other factors that come into play surely. Confirmation bias and deterministic thinking would seem to be two other likely candidates.

My focus right now is on the latest tax change and the user experience aspects that the White House and Congress overlooked. There are numerous stories recently explaining that tax refunds are down, by some estimates around 8%. Whether that is a selection bias or part of a broader trend remains to be seen. The reason for the reduction in refunds is the reduction in withholding that occurred at the same time, and apparently there was some imprecision in the formulation of the withholding tables. While it is likely not the case that people saw less money back from the tax cut the crafters gave inadequate thought to how people would react.

Supposedly the design of the policy, specifically the increased money in paychecks, was going to assist the Republican candidates in the midterm elections. Umm. Great plan. Really worked well. Nothing comes to mind immediately but there is probably an appropriate Rodney Dangerfield Caddyshack line that could be used here. So the immediate tax relief to the taxpayer did not translate into legislative relief. Now you get the second stage.

The tax refund season is upon us and people so far see lower tax refunds. Why? Some of that refund got moved forward in the form of the lower withholding. This is making people upset because the tax refund is typically a larger dollar amount and people pay attention to that.

This is the user experience aspect that was overlooked. If you take $1200 in a lump sum and give it to someone as $100 in 12 monthly installments many will not be happy about it. They are not “out” any money, and a time value of money argument may actually be in their favor, but the perception is that they have less for some reason. It may be a method of forced savings for larger purchases. Individuals may feel like they are more likely to spend the money rather than save it when it comes as smaller amounts in installments.

Should this change the design of policy? My argument is yes. From a dollars and cents perspective it is fairly easy to make it clear that individuals suffer no “losses”, but their perception does matter, to politicians more than almost any other group. I am not an elected official and I am an economist so I have no problem telling people they are being irrational and inconsistent. Your typical elected official, if they want to become a re-elected official, cannot be so bold.

If taxpayers truly prefer receipt of larger refunds and less money in the periodic pay packet you need to understand that and incorporate it into the design of policy. The same should hold true for other types of economic policy, actually all types of policy whether economic or other, at the national or local level. The public dissatisfaction with the outcomes of the tax act so far suggest too little attention paid the individual user experience and too much time spent on easy talking points that did not end up satisfying people anyway.

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