Monday, August 09, 2004

Anything but simple is a tax within itself

I think Mark Latham is on to something. The words simple, simply, and simplify appear 12 times in his 20-page tax manifesto. We are told the new Working Tax Bonus will be administered simply. We are told that the Better Family Payment will replace three existing payments and be fair and easy to understand.

Labor appears to believe that the promise of simplicity is important in its own right, over and above the dollars that its tax package would actually put into our hands. And there is a vast amount of new psychological and economic evidence to suggest that it is right.

It was John Howard who twigged to the concept first. Asked in 1996 by the ABC's Liz Jackson to describe his vision for Australia, he replied, "relaxed and comfortable", an answer that on its face sounded inadequate, but may well have tapped into a national yearning. It is an understanding his Government has moved away from ever since.

Under Howard's watch, the standard income tax form has swelled from six pages to eight. Most of the extra invasive questions would have once had no place on a tax form. They deal with family arrangements and health insurance.

The family payments system itself is so complex that it takes a good deal of foresight and calculation to work out whether it is worth making an application. If you make a mistake, you have to pay money back.

Decisions about whether or not to take out private health insurance involve a complex interaction of sticks and carrots involving age groups and income-tax rates.

I know of at least one PhD in economics who finds it too complicated to calculate. Families using the new Medicare safety net are supposed to collect receipts or work out ahead of time whether they will need it.

Small businesses were promised an easing of their paperwork burden in a prime ministerial statement in 1998, but two years later were hit with the new Business Activity Statements as part of the goods and services tax. And soon all Australian employees will be required to choose between several competing superannuation funds.

Until recently, Australia's economic mandarins acted as if this extra complexity didn't matter. The important thing was that we were being offered choice: choice of phone company, electricity supplier, super fund and so on.

The Treasury view is that choice is still good. But last month something changed. For the first time in an economic statement, the Commonwealth Treasury acknowledged that simplicity also mattered. It said that the level of complexity that people were subjected to in their daily lives could amount to a significant economic cost.

It is new thinking that derives partly from research involving jars of jam....

Until about four years ago, the conventional wisdom was that people enjoyed being offered choice, and the more choices the better. But then two psychologists from Columbia and Stanford universities asked what would happen if the number of choices on offer became very big.

Sheena Iyengar and Mark Lepper set up a jam-tasting booth in a Californian gourmet grocery store. On display were exotic flavours including kiwifruit, black cherry and lemon curd. They asked shoppers approaching the booth to try as many flavours as they wanted and then take the opportunity to buy one of the jars for a discount using a coupon at the checkout.

At times, the booth offered a choice of six flavours, at other times it offered 24.

Their finding was startling. At the times when they offered only six flavours, 30 per cent of the shoppers who tasted bought. At the times when they offered all of the flavours, only 3 per cent of the shoppers who tasted bought. Too much choice appeared to have overloaded the shoppers' brains, leaving them paralysed with indecision.

And odder still was the fact that the booth was at its most popular when it had all of its flavours on display. More people stopped to try jams when the biggest variety was on offer, but most didn't buy them.

Like moths to a flame, we appear to be attracted to the idea of a big choice but beyond a certain point, incapable of handling it.

Iyengar and Lepper tried the same sort of experiment on their students. They offered higher grades to students who would attempt an extra essay. They told some of the students they would have a choice of six essay topics; they told others they would have a choice of 30. The students who had to choose between only six topics were both more likely to take up the offer and more likely to write better essays.

Through this and other experiments, Iyengar and Lepper have come up with a guesstimate of just how much choice human beings can comfortably handle. They say when the number of choices on offer climbs too far above seven, we get uneasy.

An exception comes into play for superannuation plans, in which case the number appears to be two.

In the US, super contributions are voluntary. Iyengar examined the super status of 800,000 workers and found that the contribution rate was the highest among employees of firms that restricted the choice of funds to two. For every extra 10 funds added, the contribution rate dropped by 1 to 2 per cent.

George Lowenstein, from Carnegie Mellon University, thinks he knows why we resent being asked to make complicated choices. He says it's because they take up our time, we know we are liable to make the wrong decisions, and we know we will blame ourselves if we do.

He illustrates the point this way: car manufacturers offer us choices of colour, engine size, upholstery and the like, but they don't offer us the ability to choose between internal seatbelt mechanisms.

Lowenstein says that's because the manufacturers know that we lack the expertise to make such a choice; they know that it would take time to acquire that expertise, and they know that we might never forgive ourselves if an accident proved our decision to be wrong. By relieving us of the responsibility for carrying out a task for which we are not equipped, the car makers are providing us with real value.

It's a strategy open for government to adopt as well. Once upon a time, it constituted the rationale for government.

By promising simplicity, Mark Latham has taken a small step toward reclaiming that rationale.