‘Ripple Effect’ tackles taxation

“Ripple Effect,” the Wharton School’s faculty research podcast, explores what inspires experts’ studies and how their findings resonate with the world today. The past month’s episode series, “Tax Talk: Navigating the Numbers,” delves into how our psychological reactions to paying taxes influence compliance and perceptions of fairness. Wharton faculty discuss the implications of international taxation on U.S. workers, revealing insights into global financial dynamics.

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“Tax Talk: Navigating the Numbers” looks at how taxes shape consumer trends, impacting both spending habits and market movements. The featured experts uncover the daunting challenges politicians face when addressing fiscal policies, especially when they must confront their greatest fear: implementing necessary yet unpopular tax increases.

In “Psychology of Paying Taxes,” Alex Rees-Jones, associate professor of business economics and public policy, explains how the delicate balancing act of paying and collecting income taxes is really an exercise in behavioral economics.

“There’s a very strong and natural gain/loss framing inherent in most people’s tax experience,” says Rees-Jones. “Come every April 15, when you have to fill out and submit your tax forms, a lot of this is going to be centered around doing a kind of gain/loss calculation, where the main thing you’re doing is going through documenting all the types of income you’ve had over the year and figuring out your tax liability. That’s what the point of this really is. But the last stages of it are going through and saying, ‘How much tax did I already pay,’ say, through withholding from your employer or estimated taxes or something like that? Then what’s the difference, the balance due? And based on that, I decide how much money is changing hands between me and the IRS.”

In “Do Sin Taxes Actually Work?,” assistant professor of business economics and public policy Benjamin Lockwood’s research into sin taxes finds that they work to raise revenue and curb consumption, but the long-term effects aren’t as clear.

Lockwood explains, “from an economics perspective, the way I think about this is not necessarily that you need to tax things just because they have harmful health consequences. There are lots of things that might be harmful for one’s health, but people are aware of those harms, and they’re interested in doing the thing. We don’t necessarily tax mountain biking or rock climbing just because they can be dangerous.”

And in “International Taxation and U.S. Businesses,” finance professor Daniel Garrett explains how the complicated structure of international business taxes impacts multinational American firms, both domestically and overseas.

Part of Garrett’s research looks at how all of these components potentially impact corporations and domestic workers. “Whenever we talk about tax reform, we’re usually thinking about the end goal. Trying to come up with increasing welfare and increasing opportunity for people in the U.S. is usually the political statement that people are making when they’re saying, ‘We want to lower tax rates, we want to raise tax rates, etc.,’” he says. “What we do in our research is we try to say, 'OK, a lot of countries around the world have been moving from worldwide systems, where they’re going to tax all of the profit of the corporations that reside in their jurisdictions, to only taxing the local profits.' What does this do to the way in which firms invest in local communities, and what does that do to the prevalence of local jobs, and that sort of thing? When we cut Apple’s tax rates in Europe, what happens to the number of people Apple is employing in the U.S., and the number of people that are being employed in support roles not just by Apple, but by other companies?”

For a full list of podcast episodes, visit the “Ripple Effect” website.