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March 30, 2011 at 12:17 PM
A Senate Finance Committee hearing on Wednesday revealed that poorly understood, confusing and impermanent tax policies muted the effectiveness of beneficial tax policies in ways that affect both businesses and individuals.
These factors also have an impact on the effectiveness of government spending and cost factors, and could be an avenue for the government to save money by transferring its focus to programs that are more easily understood and more often utilized.
Testimony at the hearing, titled “How Do Complexity, Uncertainty and Other Factors Impact Responses to Tax Incentives?” by Dr. Raj Chetty, professor of economics at Harvard University, demonstrated that policies and benefits as diverse as Pell grants and green incentives, sales taxes and the Earned Income Tax Credit are little used by groups who do not understand them or the impact they can have on their income and tax base.
Chetty also pointed out that the government could save money by cutting back on programs whose demonstrated effectiveness was poor compared to other programs seeking to accomplish similar goals. The most effective programs, he said, were the simplest; he added that automatic opt-in plans, such as for 401(k) participation, were far more effective than anything to which an individual had to opt in on his own.
