Research Portfolio | Economics
What is the cost of hidden taxes?
Electronic tolls ease congestion on roadways but distance voters from the act of paying taxes. Economist Amy Finkelstein has found that drivers who use E-ZPass and similar technologies rarely even know how much they are paying in tolls. The result? Higher tolls without the political consequences usually associated with a rise in taxes.
Late in life, the economist Milton Friedman regretted his role in the creation of the federal income tax withholding system because he believed that making taxes less visible encourages the growth of government.
A Road Test
Many economists share this assumption, but there was no empirical evidence to support it—until Professor Amy Finkelstein decided to give the idea a road test. She and her fiance had spent many months driving back and forth from Boston to New York to plan their wedding. Being economists, they had amused themselves on the journeys trying to calculate the cost of the trip—until they realized that thanks to E-ZPass they didn’t know how much they were paying in tolls.
The Effect of E-ZPass
E-ZPass and other electronic toll passes make it so easy to pay tolls that people often don’t know how much they’re paying, Finkelstein discovered, making this a perfect test case for investigating whether the visibility of a tax affects its size.
By studying electronic toll-taking on 123 U.S. highways and bridges over a period of more than 50 years, Finkelstein found that the introduction of electronic tolls typically led to a 20 percent to 40 percent increase in tolls relative to what they would have been if the tolls had to be paid in cash. She also found that electronically collected tolls were less tied to the election cycle than those collected manually, supporting the theory that less visible taxes are indeed easier to raise.
A Landmark Paper
Amy's landmark paper, “E-ZTax: Tax Salience and Tax Rates,” will appear in the Quarterly Journal of Economics later this year.
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