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Crazy Rich Men, Mental Accounting, and Tax Policy

2014 March 6
by Eric Horowitz

I’ve got two new articles up at Pacific Standard. The first looks at a potential psychological explanation for why rich people keep saying crazy things about the extent to which they’re the victims in our society.

Why do rich men keep revealing themselves to be inept at using the English language to communicate their ideas—however outrageous? Attempts to explain their zealous defenses of the one-percent generally involve phrases like “limited view of reality” or “social bubble,” but perhaps the most interesting explanation comes from psychological research on the theory of needs-based reconciliation…

The theory posits that perpetrators and victims each desires a different basic psychological need—perpetrators want social acceptance, victims to feel empowered—and reconciliation will be most likely when each is fulfilled…

It’s not a stretch to map these findings onto the American social system…

Read the whole thing!

The second article takes a look at new research on mental accounting, and specifically how it might be relevant to tax policy.

The imagined origin of the money influenced how participants chose to spend it. As predicted, participants were less likely to spend the inheritance money on either purchase. Participants who did choose to spend the inheritance money were less likely to spend it on the resort compared to money from the other accounts…

Even if individuals draw some emotional benefit by saving inheritance money, from a social standpoint it’s better if people—and wealthy people in particular—spend their money on durable goods or semi-risky investments…

It seems that the tendency to save inheritance money is another reason to support a higher estate tax. If mental accounting is preventing inheritance money from being spent in the most efficient way, that strengthens the case for raising estate tax revenues to fund welfare programs (and if you lean right and cringe at that word choice, just replace “welfare programs” with “other tax breaks for the wealthy that are more stimulative.”)

Once again, read the whole thing!

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