Thursday, August 15, 2019
Eric Smith (Weber State University) has posted Exploiting the Charitable Contribution Deduction's Hypersalience, Utah Law Review (forthcoming). Here is the abstract:
Hypersalience describes the cognitive error that occurs when taxpayers are highly aware of a tax provision generally, but fail to correctly perceive its associated limitations. The charitable contribution deduction provides a strong example of hypersalience as taxpayers have general awareness that tax benefit follows charitable giving, but often fail to understand the deduction’s limits—most notably the standard deduction’s preclusion to any direct tax benefit for charitable giving. As cognitive error drives inaccurate perception of the tax law, the question arises: what, if anything, should the government do to correct taxpayer understanding?
This paper considers this question from two perspectives. The first is market or economic salience, a measure of salience based on taxpayer reaction towards the market. The case is made here for exploitation of hypersalience—an argument that endorses the status quo. Effective curtailment of hypersalience could bear with it constitutionally worrisome burdens on free speech and an overregulated, less viable charities sector. Benefits of leaving hypersalience intact include a more vibrant charities sector. In some cases, giving induced by hypersalience could result in zero utility loss.
The second measure, political salience, considers taxpayer reaction as expressed through the political process. This paper argues that exploitation of hypersalience is justifiable in that taxpayers could interpret additional regulation to correct hypersalience as a tax increase (or at least as the denial of perceived tax benefit). Given the taxpaying electorate’s strong aversion to taxes, in an era of political polarization and massive deficits, Congress can ill afford to expend constrained political capital unwinding taxpayer cognitive bias with no increase in revenues.