Behavioral Economics and Tax Policy

Behavioral economics is changing our understanding of how economic policy operates, including tax policy. In this paper, we consider some implications of behavioral economics for tax policy, such as how it changes our understanding of the welfare consequences of taxation, the relative desirability of using the tax system as a platform for policy implementation, and the role of taxes as an element of policy design. We do so by reviewing the logic of specific features of tax policy in light of recent findings in areas such as tax salience, program take-up, and fiscal stimulus. * William Congdon is Research Director and Jeffrey Kling is Senior Fellow at The Brookings Institution, and Sendhil Mullainathan is Professor of Economics at Harvard University. This paper was prepared for the National Tax Association’s 2009 Spring Symposium.