Why We Dodge Taxes but Punish Tax Dodgers

Here’s the thing about a big group of people: the vast majority of us (save a few morons) realize that we need a way to pool and direct resources (i.e., a tax system or government), but individually, we’d really like to avoid either. Of course, when anyone else tries to avoid taxes or the law, we’re pretty happy to come down hard on them.

That’s the gist of a new study published in PNAS. Researchers wanted to explore people’s reactions to “secondary punishments”, which is when a government goes after someone for non-cooperation. Researchers designed a pretty simple game theory-inspired experiment. They gave participants the opportunity to contribute money towards a central fund, which was then multiplied and then returned to all members of the group. If everyone contributed the maximum amount, the group benefited the most, as they’d reach the highest possible number before the fund was multiplied. On the other hand, the smartest individual move would be to contribute as little as possible and happily take the group’s multiplied money.

However, researchers also added the possibility of a central authority. If participants chose to fund it, it immediately started punishing non-payers. The authority also handed out secondary punishments, in this case, fines, to those who didn’t pay. The effect of funding a central authority was an increase in group profits, since everyone started paying in.

After a few rounds of play, researchers divided their participants into two halves. People in the first half had to stick with the group they were playing with, but they could take a majority-rules vote about whether or not to have secondary punishments. People in the second half were allowed to get up and play with a different group, essentially looking for the best deal.

So, how’d they do? Participants in the first half mostly voted (about 80% of them, actually) in favour of secondary punishments, and their group profits soared. By contrast, participants in the half that allowed moving saw a whole lot of moving; 70% of those participants moved to groups without secondary punishments. However, the trouble with all the selfish people moving in similar circles was that their profits shrank dramatically, and over fifteen rounds of play, more of them moved back to groups that did have secondary punishments.

So, the next time you’re hanging out with a buddy who won’t shut up about his high taxes, encourage him to move to a more low-tax locale—like Greece, or Somalia. He’ll be back after a few rounds of play too.

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