Bryan Caplan  

Using Loopholes

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Suppose an economist tells you about an obscure tax loophole: You can reduce your taxes without going to jail.  You've never taken advantage of it because you've never even heard about it.  But when you investigate his factual claims, they seem to check out.  The people who've carefully studied the issue broadly agree with him.  How should you react?

a. Say "If people were rational, they'd already be taking advantage of this loophole.  Since they're not taking advantage of it, the opportunity is illusory."

b. Say "Your argument assumes that people want more money.  Some of us like paying taxes."

c. Say "This loophole is only useful for middle and upper class people who itemize their deductions and have the mental flexibility to revise their tax returns.  How many people is that?" 

d. Say "Good to know.  Even if I can't use this loophole right now, it may come in handy later on."

When an economist points out a tax loophole, (d) seems like the most sensible reaction by a wide margin.  (a) absurdly equates rationality with omniscience.  (b) treats a very common desire like an eccentric quirk.  (c) dismisses vast numbers of people as a minor footnote - and ignores option value.

OK, now suppose an economist points out a parenting loophole: You can make fewer sacrifices without hurting your kids.  Once again, the people who've carefully studied the issue broadly agree with him.  Tell me: Why are people so reluctant to simply affirm (d)?  Why are they so quick to say (a), (b), or (c)?  Why?


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COMMENTS (22 to date)
Lars P writes:

Published articles are not a good sample of people's reactions, but of what is useful to publish.

Nobody will write, much less publish, a d text.

Only "Caplan is wrong and here is why" or "Caplan is a genius who will revolutionize child rearing" articles are strong enough reactions to be publishable.

Tom writes:

As Robin Hanson might say, parenting is not about raising children.

Philo writes:

On taxes: (a) is not to be lightly dismissed; people *do* tend to take advantage of the loopholes, so knowing that no one is doing X is evidence that X is not really *taking advantage of a loophole*. But (a) has less force against a *newly created* loophole. If the tax law has recently changed--and it is almost continually changing--it will take the news about the new loopholes that have been created to spread. You might, after all, be one of the first people to figure it out. (Occasionally a $20 bill *is* lying on the sidewalk; someone just dropped it, and you were the next person to come along.)

On children: (a) does not really assume omniscience, just that conventional practices are (conventional) *wisdom*. But this *is* a more dubious assumption in the children case than it is in the taxes case.

Aside (still on children): I wouldn't say (d) because I am too old to have any more kids.

Will Wilkinson writes:

I'm looking forward to the pacifism book!

Willem writes:

Pecunia non olet, but children do.

(Or in taxes people can more easily put moral issues aside and do economic calculations than when something social like 'children' is concerned.)

nazgulnarsil writes:

what tom said.
the lower classes don't have ideology and don't do cost benefit analysis, at least not rigorous ones. for the middle class the costs that you describe are only a small part of the total social investment.

Tom West writes:

To take the analogy further, for some I suspect it's that if it turns out that the loophole *wasn't* legal after all, you're facing a literal life sentence.

Plausible though it might be, it's just not worth the risk.

(Besides, "parenting doesn't matter" is massively counter-intuitive. It's as bad a "fewer medical tests may mean better outcomes".)

GinSlinger writes:

Isn't (a) essentially the old joke about a Chicago professor and graduate student walking down the street. They spot something green on the ground and the graduate student bends over to pick it up. "What are you doing?" asks the professor. "I'm picking up this twenty dollar bill" replies the student. "Impossible," replies the professor, "if it was real, somebody would have picked it up by now."

joecanuck writes:

People don't put that much faith in social science research. Especially if the conclusions of that research are counterintuitive. And as Tom West pointed out: the stakes are high enough that it's not worth taking chances.

Tracy W writes:

On the other hand, with parenting, if you don't trust social science research, what is the better method of deciding what to do?

Parenting advice seems to be all over the place, for example from strict bans on showing affection to your children (in case you spoil them) to mandatory requirements to show ample love and affection to your children (in case you wreck their self-esteem). Did Amy Chua support her children's self-confidence and create in them a drive for excellence that will serve them well all their adult lives, or is she a child-abuser? Is a strict bedtime absolutely necessary for a growing child to get sufficient sleep, or is depriving a child of autonomy likely to lead to a child incapable of making decisions on their own?
Whatever view you form, there will be someone on an internet forum somewhere who will call it child abuse.

Nicola writes:

Because people perceive the potential negative consequences of changing their parenting styles to be a lot higher than the potential negative consequences of changing their tax returns.

Bob Murphy writes:

Bryan, I think because the better analogy would be an economist saying, "Hey, I've discovered that your payment of income taxes doesn't actually affect your checking account balance after all. So go ahead and spend without regard to your tax liability, since the two really don't have much to do with each other."

Not a perfect analogy, I grant you, but it at least captures why I reject your arguments on parenting.

RJB writes:

Let's change the analogy a little bit, to make it more sound: your friend argues that some strategy of tax avoidance will make you richer because it is actually legal, and the IRS will not penalize you for trying it. It's a novel plan so the evidence for his position isn't great, but growing numbers of tax experts agree.

Response A seems pretty reasonable if someone asks why people aren't already taking advantage of the strategy--it just isn't that certain to work. In fact, there is a large body of research (search for Scholes-Wolfson and tax) that follows the logic of A and C. These researchers infer the true costs and benefits of tax strategies from the extent to which they are practices in various settings. This is classic revealed-preference reasoning.

Response B is pretty silly in a tax context, but a lot more reasonable in family planning settings, in which the utility of benefits and effort vary far more across individuals than the utility of money.

That variation is what leads to Response D, along with the fact that people have much stronger views on the impact of extra children on their life than on the legality of a loophole.

David Friedman writes:

One answer to your question is that there are two different reasons to follow your advice on child rearing--because a parent is convinced by your arguments or because he is willing to sacrifice the welfare of his children in order to get more leisure for himself. People don't want to believe the latter of themselves or have other people believe it, and rejecting your arguments is one way of protecting themselves from that.

Ben writes:

Nicely done, sir; I call this a knockout punch.

One difference between the prongs of your analogy is that tax-filing is largely zero sum, while parenting decisions are not. I don't want other people to find more tax loopholes, but I do want them to use the parenting loophole.

lemmy caution writes:

"One answer to your question is that there are two different reasons to follow your advice on child rearing--because a parent is convinced by your arguments or because he is willing to sacrifice the welfare of his children in order to get more leisure for himself. People don't want to believe the latter of themselves or have other people believe it, and rejecting your arguments is one way of protecting themselves from that."

This is true. The people who will be convinced by your argument will tend to be less conscientious than average. This isn't something that you want to signal to a potential mate.

It is also possible that your kids will not be convinced that you did the right thing. This is a bigger problem for moms than dads:

http://online.wsj.com/article/SB10001424052748704462704575590603553674296.html

http://online.wsj.com/article/SB10001424052748703805704575594213125914630.html


Brett writes:

The reason is because it contradicts what our culture (e.g. American Caucasian culture) tells us to do.

Let's pretend you are a famous alpha male like Barry Bonds. You are married and you have a mistress, which your wife consents to. You have children with both women. Should that be illegal? No. What if Barry wants to marry the mistress (i.e. have two wives), should that be illegal? Yes. Q: Why, what's the difference? A: Because our culture says so.

Our culture tells us that you should be financially successful, never let your kids cry themselves to sleep, remove every risk of injury or harm from the child's environment, pay for orthodontics, college, memorable weddings etc., and never miss out on an opportunity for development.

After understanding what you were saying, I now agree with you, but am afraid that it may take a hearty helping of genetic selection before mellowness is again in vogue among parents.

Evan writes:
But (a) has less force against a *newly created* loophole. If the tax law has recently changed--and it is almost continually changing--it will take the news about the new loopholes that have been created to spread. You might, after all, be one of the first people to figure it out.
This is a newly created loophole in a sense. The research and discoveries that allowed us to find it are less than 15 years old (The Nurture Assumption was only published in 1998), and the research that confirmed it is even younger. It makes sense that it wouldn't spread to the general population yet.
Tom West writes:

I do want them to use the parenting loophole.

But only because that boosts your child's chances at Harvard :-).

Tracy W writes:

Brett - but cultures change all the time. In my grandmother's time, you always let children cry themselves to sleep, in my mother's time, you never did. In my time - you pick one view and accuse anyone who differs from you in any way of child abuse. (Well, that's probably a bit sweeping).

Ben writes:

@Tom West,

No, it's because I want them to have more kids and for their kids to invent some cool stuff. In wealth countries, having kids generates positive externalities, so loopholes that facilitate more people having more kids have benefits even to those that don't exploit the loopholes.

Peter writes:

Prof Caplan,

You ask why?

Parenting is a huge time commitment. Tax returns and loopholes are short duration attention demands.

It is far easier to make a decision about a loophole with a half hour phone call to a CPA, than it is concerning bringing another child into the world. Responsible people recognize each child requires at least 16-18 years of attention and resources.

Some men go the pure biological route and breed as many women as possible, without the slightest inclination or desire of being a father after conception. In that instance, the females are left to raise the child alone - an even greater time commitment.

Kids are great, I was one once myself. Huge responsibility, best not to be causally compared to tax loopholes.

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