Our panel discusses how to reform the U.S. tax system; and Professor Scott Rick discusses his research into how spouses shape each other’s spending.
In this episode, professors from the Ross School of Business at the University of Michigan tackle the question, “What’s wrong with taxes?” They discuss a brief history of taxes in the U.S., why income taxes are so complicated, ideas for reform, and more. Then, Professor Scott Rick talks about his research into the ways that spouses shape each other’s spending habits.
Contents of this episode:
Taxes discussion: 01:01-33:56
Spending interview: 33:59-38:40
More information about some of the topics discussed on today’s episode:
Book: Taxes in America: What Everyone Needs to Know by Leonard E. Burman and Joel Slemrod
Book: Rebellion, Rascals, and Revenue: Tax Follies and Wisdom through the Ages by Michael Keen and Joel Slemrod
Paper: “The Lifecycle of the 47 Percent” by Don Fullerton and Nirupama Rao
Paper: “You Spent How Much? Toward an Understanding of How Romantic Partners Respond to Each Other’s Financial Decisions” by Jenny G. Olson and Scott Rick
Paper: “Common Cents: Bank Account Structure and Couples’ Relationship Dynamics” by Jenny G. Olson, Scott Rick, Deborah J. Small, and Eli J. Finkel
And to learn more about other work being done by Michigan Ross faculty, visit our website.
Have thoughts about topics we should cover or just want to get in touch? Send us an email at email@example.com.
Business and Society is brought to you by the Ross School of Business at the University of Michigan.
Copyright 2023 - University of Michigan
0:00:09.1 Bob Needham: Hello and welcome to Business and Society with Michigan Ross. My name is Bob Needham, here with my colleague, Jeff Karoub from Michigan news.
0:00:16.3 Jeff Karoub: Hey everybody.
0:00:17.4 BN: And we're coming to you from the Ross School of Business at the University of Michigan. On this podcast, we consider some of the ways the business world interacts with our broader society for better and sometimes for worse. Today, our panel of Michigan Ross professors will talk about taxes, the good, the bad and the ugly of tax policy, and we'll hear some research into how spouses shape each other's spending habits. It's a brisk spring day in Ann Arbor, and we're glad you're here.
0:00:43.2 JK: Before we get started, I'd like to encourage our listeners to subscribe, rate and review the podcast. It helps other people find us, and we'd love to hear what you think of the show. You can also reach out via email if you have a question or you wanna say hi. Send us a note at firstname.lastname@example.org.
0:01:02.3 BN: On today's episode, we're discussing the question, what's wrong with taxes? And we're joined by two Michigan Ross professors who will provide some answers; Nirupama Rao and Joel Slemrod. I'll ask them to briefly introduce themselves. Joel.
0:01:13.7 Joel Slemrod: Hi everybody. I'm Joel Slemrod. I'm a professor of economics in Ross and also in the Economics Department of LSA. I've been here since 1987. In addition to being a professor here, I'm director of the Office of Tax Policy Research, which is a research center, which is, guess, about taxes. My research has been about really all aspects of taxes, including some fun things. A recent paper of mine is about joint income tax returns, whose name goes first? And the answer is, in almost 90% of cases the man's name goes first.
0:01:54.6 BN: Nirupama.
0:01:55.5 Nirupama Rao: Hi. I'm Nirupama Rao. I'm an Assistant Professor here at Ross. I joined Ross in 2017. Before I came here, I was actually at NYU, and actually serving government at the Council of Economic Advisors for a couple years in the Obama administration. My research really focuses on the way firms react to taxes, so how taxes affect the way firms invest or price or decide how much to produce. I'm really excited to be here today. Taxes are important policy issue, and I think in the coming year or two, we're gonna hear a lot about taxes and how they reflect our values.
0:02:28.1 BN: Yeah. Great. Thank you both for being here. Maybe a little bit of history could provide some helpful background for our discussion. Where did the concept of Texas even come from?
0:02:40.5 NR: So taxes date back to the Pharaohs. The Pharaohs used to collect like 20% of all grain harvests as an in-kind tax. For this discussion, it might move us to fast forward a little bit and think about taxes in the United States. So like a lot of countries that are developing, the US originally depended on tariffs for most of its tax revenue. But then after the Civil War, there's a lot of industrialization, the US stopped importing quite so much and started exporting more and revenues fell, and so the US federal government needed more, needed a new source of revenues. So that's when we ratified the 16th Amendment of Constitution, which allowed for income taxes on individuals and businesses. This sort of income tax was quite small for a while, but then during the World War period, government expanded, of course, in the war effort but also new ideas of what government could do.
0:03:36.2 NR: And the income tax really grew as a source of revenue, and it's much more like what we have today, which is today, the income tax is actually our largest source of revenue at the federal level. Other taxes were added. Early 20th century, we saw the rise of the estate tax, the gift tax, and the Great Depression really changed our tax mix because the Great Depression devastated the incomes of elderly people who, of course, as they were in their older years, didn't have a chance to reconstitute their savings, so the creation of social security to give them transfers also brought the payroll tax that funds it. Today, income taxes are still a big part of our revenue picture, but the US funds its federal spending with taxes and frankly a lot of borrowing. But the US wasn't always this credit worthy. So for a long time, it really was the income tax and historically other taxes that comprise our revenue picture.
0:04:30.8 JS: One thing I'd add is that distinction between taxes and spending is not completely clear cut, it's a little blurry. So an example is we have, within the US income tax, we give substantial credits. The earned income tax credit for low income folks, child related credits. It doesn't really have anything to do with raising revenue, and why the IRS is in charge of this is an interesting question. Imagine though if we took those two things out of the tax system. So we kept giving the credits, but some government agency just directly gave the money to eligible people. So what would that do? Well, tax revenue would go up, because we'd get rid of all these credits, and government spending would go up. So it would look like we have a bigger government, higher taxes, higher spending, but actually nothing substantial will have changed. And so as we talk, in a few places, we have to keep in mind that the distinction between taxes and spending isn't crystal clear.
0:05:36.8 JK: If we as a society agree that some form of taxes are necessary, then the question focus on what types of taxes and who pays them. One clear split is business versus individuals. In broad terms, how can we decide whether each side is paying its fair share?
0:05:55.2 JS: Yeah, this brings up an important, although it might sound a little nerdy, distinction between when you say who pays them and who bears the burden. It is true that businesses pay a lot of taxes in the sense that they are... The CFO writes checks. But from an economics point of view, what's important is who bears the burden, who is worse off because of taxes? And economists like to answer that question by thinking about individuals, which individuals are worse off because of a corporation income tax? It doesn't make sense to say the corporation is worse off, although their profits might go down. I wanna know whether it's their shareholders that are worse off, their customers that are worse off because they have to raise prices. So I think an important question becomes whether taxing businesses or taxing individuals is less damaging to the economy, and for both kinds of taxes to kind of trace through who bears the burden.
0:07:00.5 NR: Whenever we talk about who should pay their fair share, businesses and wealthy individual, I can't help think about poor Mitt Romney who in 2012 went out there I think on some campaign to...
0:07:09.9 JK: Poor Mitt Romney. Let's just pause on that for a moment, shall we?
0:07:14.3 NR: Yes, I know. Not financially poor, but poor pilloried Mitt Romney who went out there on the campaign trail, and I can't remember where he said it. He got on a stage, he said, "Corporations are people." And I think, from his years at Bain, it was something he probably thought about in the way that Joel was thinking about, that you can't tax a building, you can't tax a logo. You're taxing the people who own parts of that company, work for that company or buy the goods or services of that company. And so I think what he really meant was these taxes are borne by individuals. But building on what Joel talked about, in terms of efficiency, where are these taxes causing the least damage? When we think about who's actually bearing them, it's also, I think the equity aspect is really important as well, 'cause I think there's often a temptation to rail against corporations not paying their fair share.
0:08:02.0 NR: When you have to step back and say what you're really saying is, are the workers, shareholders, or consumers of those corporations not paying their fair share? And understanding that incidents will tell us a lot about how the total tax system's progressivity, how progressive the tax system actually is. So if we think that corporate taxes are largely borne by workers, we're gonna feel very differently about increasing corporate taxes than if we think they're borne by shareholders. If they're borne by consumers, are the consumers of a particular business low income people, high income people? Those are all the ways in which seeing through the firm and thinking about how it's the people, as Mitt Romney mentioned, that pay the taxes really does matter.
0:08:40.6 BN: So particularly for those who may be going through the process right now, why do income taxes have to be so complicated, or do they?
0:08:48.8 JS: Well, certainly true that, for a lot of people, income taxes are quite complicated, and I think there's no question the tax system has gotten more complicated over the years. So why? Well, first of all, tax, the income tax gets more complicated when we're not willing to settle for rough justice. We care about justice, but how much do we have to get into the detail? A good example is itemized deductions. Up until a few years ago, about 30% of Americans who file tax returns could itemize all the deductible expenses they have subtracted from their taxable income. And then a few years ago, that was changed, so now only about 10% do so. Well, should the 20% that used to itemize no longer can will just get a lump sum deduction?
0:09:38.2 JS: Well, we're not as finely distinguishing between their tax liabilities, but it's easier. Those 20% of folks don't have to keep track of and document their deductions. The income tax system also gets harder, as I mentioned a minute ago, when it's used to deliver social programs. They are an income tax credit, child tax credit, and a bunch of other things, are really social programs delivered through the tax system. And so because of that, it gets more complicated. And finally, I think the tax system is getting more complicated because people's financial situation is getting more complicated. A lot more people have foreign asset holdings, people have crypto holdings, and these have tax implications, and so the tax system has to keep up with a complicating world.
0:10:31.2 NR: That's a great point. I mean, there's these ideas. There are countries where the government will mostly complete your return, basically send it to you and you say, "Yeah, that looks right," you sign it and that's the end of your filing. It's a very light touch for the individual. And every four years on the campaign trail we hear things about, what if we'd have a postcard system where your return fit on a postcard? Those fantasies really would require us to be a very different country, where we are more comfortable with the world that Joel described, where we raised revenue at the tax system and spent it on a spending side, where there are institutions that spent the money versus doing the spending through the code. It's really the ways in which we offer incentives or transfers through the tax system that make it complicated.
0:11:17.7 NR: So in order to have that world in which your taxes are simple, we'd have to give up the idea that married individuals are taxed differently than two single individuals with the same income would be. Or that you get deductions for various activities like home mortgage interest or charitable giving. We'd have to simplify the number of things we ask the tax code to do for filing to be easy. One thing, just hearing Joel talk, I couldn't help but think about 20 percentage points of our population used to have to itemize or used to itemize to minimize their burdens, and now don't. And I just wonder, if this went on, if this sort of large standard deduction that preempts itemizing went on for 10, 15 years, whether sort of the hassle cost of itemizing would seem more costly to people or they'd get used to a slightly simpler tax system for them at least, and it would be harder to complicate things again. I don't know.
0:12:07.9 JK: Well, speaking of politics and the campaign trail, it seems that somebody is almost always calling for a major change to the tax code. We talked about some examples of that. For example, in recent years, we've had Senators Elizabeth Warren and Bernie Sanders, they've argued for an annual wealth tax. Would this be a good idea? And why or why not?
0:12:29.6 JS: Yeah, thinking about adding a wealth tax to the US tax arsenal raises a lot of important and fascinating questions. One is that tax policy is in part about values, such as, how much do we as a society value the equality of outcomes and minimizing inequality? Given my own values about that, I would favor a more progressive tax system, meaning one that shifts the tax burden toward high income, high wealth individuals and reduces the burden on everybody else. And a wealth tax would certainly do that, especially the kind that the Senators Warren and Sanders propose because it would affect only very wealthy folks.
0:13:16.4 JS: But I'm not sure a wealth tax is the best way to move a tax system to be more progressive for a lot of reasons. If it were up to me, I would first tackle the tax treatment of capital gains. Capital gains are disproportionately received by rich people, and at the same time, are quite preferentially taxed. So if we were gonna take seriously making the tax system more progressive, I think that'd be the first place to look. And unsurprisingly in the recent Biden budget, the budget does take a couple steps toward doing exactly that. Now, it's not gonna pass, but it is the kind of thing I think we're gonna hear more about in the future.
0:14:01.9 NR: Yeah, I think that'll be a feature on the campaign trail, about higher tax rates on investment income for high income individuals and closing the loophole that is long, since 2017 allowed pass through, which is small business type income, but also reorganized their income to look like a small business to escape some of the surtaxes on investment income that began a few years ago.
0:14:24.4 BN: On the other side of the political aisle, some Republicans have proposed replacing the income and payroll taxes with a 30% national sales tax. Would that be a good policy idea?
0:14:34.3 JS: It's another fascinating one. It's another fascinating one. It's not gonna happen. It's fascinating because, first of all, we drastically shift the burden of taxes toward low and middle income households away from high income households, both because it's a flat rate, 30%, no matter who you are, as opposed to our graduated income structure now, and because it's a tax on consumption, as opposed to income. Some of the people who support this say that if we did this the system would be so much simpler, we could abolish the IRS, which in April of any year sounds like it would be a great thing. But it's not gonna happen because one reason the IRS is there is to minimize people taking advantage of the tax system and leaving the burden for everyone else, and with a 30% national sales tax, that issue is not gonna go away.
0:15:34.5 JS: The devices for tax evasion would look different, but there's still gonna be people trying to take advantage of it. Another thing that the supporters suggest is that a 30% national sales tax instead of an income tax and the other taxes it would replace would simplify the whole process, and I think that's true. It would, but the political forces that lead to tax complexity that have made our income tax system more complex aren't gonna go away. So as soon as we start thinking about a 30% national sales tax, you can just imagine the political ammunition aimed at exempting this kind of consumption, exempting that kind of consumption, and so it won't be quite as simple as proponents presented us.
0:16:26.3 NR: Yeah, I think once you start exempting things, each of those products or services might seem quite reasonable. Like we're gonna exempt groceries and then we'll exempt gasoline 'cause people need that to get to work, and we'll exempt children's school supplies 'cause that's necessary for children, and we'll exempt this and that and this and that. And eventually the base has been cut away to the point that to fund our government on a consumption tax on what remains will require rate much higher than 30%.
0:16:51.9 NR: And another way to sometimes think of some of these consumption taxes is like it's in some ways a stealth tax on older people because they tend to consume far more of their limited incomes or their scheduled incomes, and I think there is a view sometimes that maybe our government, on net, their Social Security, Medicare over transfers to older people. And sometimes there's a bit of... The support for consumption taxes to claw some of that back. But at the end of the day, those are the folks that vote, and I think it's very hard to imagine a world in which we're taxing their consumption at high rates that way. Those are politically sympathetic block as well.
0:17:27.8 JS: Just imagine the AARP magazine special issue on moving to a 30% sales tax, 'cause people have worked their whole life, paid income tax on their earnings, then they retire, and then suddenly there's now a 30% tax on everything they buy with the money they've saved over their working years. That's just not gonna come off well.
0:17:56.6 JK: Right. Well, last year's passage of the Inflation Reduction Act gave the IRS $80 billion in additional funding over the next 10 years. Do either of you expect that to be money well spent?
0:18:08.7 JS: Well, I think it certainly was needed. The IRS funding had been, in real terms, going down for many years and had been going down relative to what they've been asked to do, because there's more... The tax system has gotten more complicated as we discussed, and there are more social programs working through the income tax. Anybody listening who has tried to call the IRS, you can be put on hold essentially indefinitely. So I think we'll see better service as the IRS gets more people to do what they have to do, and a lot of the money will be aimed at restraining evasion by high income people and corporations. And keep in mind, if you're not a high income person and you're not a corporation, that kind of tax evasion done by everyone else, it's like a tax increase on you. So restraining evasion, better enforcing the tax system is like a tax cut for everyone else.
0:19:11.0 NR: I mean, in part, I think like this sort of, this new funding for the IRS is sort of swinging things back to a more normal world. There was a lot of sort of fear and animosity towards the IRS that was built up over, I don't know, the last 20, 30 years. I mean, I remember the hearing from the late '90s where William Roth of Delaware was holding these congressional hearings about abuse of the IRS and they trotted out these witnesses who told these compelling stories of their lives being appended by late in the night IRS phone calls and harassment and criminal investigations that they thought were led by personal vendettas rather than actual fraudulent behavior and tax paying.
0:19:52.6 NR: And these hearings were very compelling and I think they were televised and they helped sort of build like a broader support for reining in the IRS. But two years later, the GAO, which is like the watchdog, it's a governmental watchdog, wrote this huge report. It turned out not one of those witnesses provided an accurate description of their case, and the IRS was entirely exonerated. And each of those cases were shown to be brought for very reasonable reasons. And a chunk of those people were committing fraud, right? These were not sympathetic taxpayers.
0:20:27.7 JK: But the damage was done from a PR standpoint.
0:20:31.5 NR: Exactly. And, the IRS is reined in. I mean, I think the idea of restraining funding for the IRS became more popular because of these sort of very, very, salient stories. So I think this is really, to me, sort of a return to an IRS system that can actually keep up with the myriad ways for there to be evasion underreporting, but also just the need for help to navigate a complex tax system. Like I think we've already seen as Joel was mentioning, better customer service. I think we've already seen shorter wait times, people actually getting their questions answered. I sort of think of the IRS helpline, maybe this is a funny analogy, but you know Butterball turkeys, right?
0:21:05.9 JK: Right.
0:21:06.8 NR: During this stressful time of Thanksgiving prep runs a hotline where you can call in and be like, "Listen, I didn't thaw my turkey. What do I do?" And they'll probably tell you at that point, "It's done. Don't, don't cook a turkey tonight." But yeah. But there's like emergency help for you. And I feel like the idea that we were living in a country where like Butterball was there for you on Thanksgiving [laughter] but the IRS was leaving you on hold indefinitely. It was just intolerable. And I'm really excited to see a world in which people can get the help they need. And they don't... There's a stress to the uncertainty of your tax payments. I feel like that help can help alleviate some of that stress.
0:21:38.7 BN: We've been focusing on the federal level, but state and local taxes can be every bit as controversial. In fact, some states get by with no state income tax and others have extremely low property taxes. How do they manage to do that?
0:21:54.0 NR: Well, you can think of state taxes as sort of like a three-legged stool, right? For most states, they have a leg that is state income taxes, a leg that's state property taxes and a leg that's state sales taxes. And having these three legs kind of gives them a more diversified set of revenues, maybe scratch the burden out a bit. That's the way most states operate. Like you said, you're right that some states opt for two legged stools. Several like Florida and Texas have no income tax, while others, namely Delaware and Oregon have no sales tax. Two states actually have neither a sales tax nor an income tax. Those are Alaska and New Hampshire, and so they have one legged stools. And you might wonder how could that possibly work? Well, Alaska, as we know, is a very special case where they have a huge revenue stream that comes from oil and gas, production.
0:22:43.0 NR: And so that really sort of supplants the need for other legs to this stool. They just have like one really big strong leg. New Hampshire's a different case where it looks like they have no income tax and no sales tax, but they really have a secret stealth backdoor income tax where instead of taxing individuals, they actually have these business taxes that are taxes on business profits, but also a tax on the wages and compensation paid by businesses to workers, which is indirectly just income tax. New Hampshire also has unusually high property taxes. We're talking New Jersey High, right? So, they sort of covertly have other legs to their stool that are not formal income taxes, but work in very much the same way, but more broadly states that lack either a sales tax or an income tax generally just kinda lean more heavily on the other leg, on the other legs.
0:23:36.6 NR: But I think it's also important to remember that these taxes, there's another side to this ledger, and it's the public services and goods that these taxes support. And in general, states that opt to not have a sales tax or an income tax kind of have fewer public goods. These two legged stool states just have fewer public services at the state level, and they often leave more of the provision of goods and services to local governments that use local revenues, namely property tax revenues to support them. And so in states that lack an income or sales tax, you typically see less redistribution across local governments through these state revenues. And so you're gonna see more variation across communities within the state in the quality of public services. And I think one that's generally important to people is schools.
0:24:24.3 NR: So in states where you lack an income tax or you lack a big sales tax, you're gonna see more variation in school quality across communities. And maybe that's okay, right? Maybe people in Florida don't really want really good schools and they wanna pay less in taxes and they're older, so that might fit their preferences. And maybe it's good that people can sort into different states based on their desire for public goods and the taxes that pay for them. That's one view. And it could be true for some things, but I think when it comes to education, we have to wonder if there's sort of a negative externality, a broader negative effect of having poor quality schools. Maybe crime is higher, productivity is lower, and if those effects are spilling out into the broader national economy, then maybe those choices are somewhat less okay.
0:25:07.9 JS: There's a issue of tax competition here. The states that have low or no income tax advertise this and try to attract people and businesses. And of course those states downplay the fact that they might have a higher than average sales tax and worse than average education system. And so it raises the question of whether we're seeing a race to the bottom among states that leads to two low levels of public service. Nirupama mentioned education, but whatever, states do a lot of things healthcare. So I think it's a question to think about in the long run, whether the federal government should think about how to restrain that kind of race to the bottom tax competition.
0:25:52.4 JK: I don't know if you brought your magic wands, but I'm gonna ask you to wave one metaphorically and ask if you could make one change to the US tax system, what would it be?
0:26:03.3 NR: So my magic wand tax would be a carbon tax because unlike taxes on work or saving, carbon taxes actually make the economy more, not less efficient just by the existence of the tax itself, right? Before we even think about what to do with the revenue. The motivation behind a carbon tax is that carbon spewed to the air by the production of and use of various goods and services like gasoline or airplane trips has a negative impact on the environment. And neither the producers of these things or the consumers who use them are bearing that cost to the environment. As a result, the prices for this stuff, like the price for a given air ticket or a gallon of gas is too low. And we use more of this stuff than we would if we were bearing all of the costs involved with their production and use. So a tax on carbon would force those making or buying, these goods and services that emit CO2 to actually pick all of the costs associated with their production and use.
0:27:01.6 NR: By bringing the costs borne by people making and using the stuff better aligned with that, like all the costs, we sort of get the right quantity of this stuff being traded in the market, and that would bring efficiency. There's basically too much produced and used of carbon emitting goods and services. And so that restraint that the tax would create would actually make the economy more efficient. To economists, the best kind of tax is one that makes things better, right? Taxes on labor disincentivizes work, tax on savings reduce savings behavior and maybe the amount of capital available investment. Unlike those taxes, carbon taxes have the potential to actually make the economy more efficient. And so that would be my magic wand tax. I'm not sure we'll see one in the near future, but I think 20 years ago I thought it was a lost cause, but I'm more optimistic now than I was.
0:27:50.9 JS: I agree with Nirupama about a carbon tax. I would also take a close look, as I've mentioned, to the taxation of capital gains. I think that's ripe for fundamental reform. The capital gains are really tremendously skewed toward the wealthy, and at the same time, they get very preferential treatment compared to the wages and salaries that middle class and working class people get. The Biden budget just released, addresses this by raising the tax rate on capital gains for millionaires. And in a very interesting way, establishing a minimum tax of 25% for very wealthy folks, people with over a hundred million of wealth, where the base for which the 25% is calculated includes unrealized capital gains. So that means appreciation of assets you have, even though you haven't sold them. Neither of those are gonna happen. It seems like we have a theme here that anything we identify as good, [laughter] we say isn't gonna happen.
0:28:57.1 JK: Right. But it's a magic wand, Joel. It's a magic wand.
0:29:00.8 JS: It's a magic wand. Well, let me mention one more magic wand thing, which is I think we should consider simpler tax systems in the following sense. Many countries, as Nirupama mentioned, have what's called the return free system. Basically that would mean you get an email from the government, say February 1st and would say, "Hey, here's what we know from your employers, from W-2 forms, from your banks, from the 1099s. And based on that, here's what we think your tax return would look like. Look it over. If it's fine, just click this box and you're done." If other countries can do it, we can certainly do it. The IRS has resisted and there certainly is some political disagreement with this, but I think we should take a serious look at it.
0:29:51.9 BN: Well, thank you. Any final thoughts on anything we've discussed today or anything we've left out?
0:29:57.7 JS: Yeah, I'd like to say something about the longer term. Longer term we need to think about a few things. One is the long term, huge long-term fiscal imbalance we have in the United States. The promises we've made on Social security and Medicare, the dollar value of those promises vastly exceeds the taxes we now have in place to fund those programs. What does that mean? It means eventually something has to give, we have to cut back on those promises, or we have to raise taxes to fund those promises or some combination of the two. Again, following up on what I just said, there is no short term, there's no sign that in the short term this is gonna be addressed, but it has to be addressed.
0:30:44.3 JS: Second thing I would say long term is we should think about privacy and the role of technology. The IRS is now using artificial intelligence to optimize their audit rules. Well, Americans seem very concerned about government knowing too much about them and the government knowing something about your financial affairs is one thing that makes the tax system more efficient. Last thing is, to think about the role of international agreements. There's now a 15% minimum tax that the G20 has agreed to, and countries have to decide whether to adopt the inter connection of economies. Makes it very important to think about multinational agreements to improve tax systems. And I think we're gonna have to... We'll be doing that over the next few years.
0:31:40.2 NR: In the newer term, I think we're gonna see a really active debate about what parts of the Trump tax cuts get renewed. So if we think back to 2017, in order to pass the Trump tax cuts, the Tax Cuts and Jobs Act, the Republicans, to do it with only Republican votes, it had to be designed to sunset after 10 years to fit within the budget rules that allowed them to pass it with justice of the majority. And so all of this stuff is gonna come due, it's gonna come, it's gonna expire at the end of 2025. And unlike sort of the fantasy pieces that are like projections of different parties values like the taxes that the Biden budget describe, I think the debate around these tax cuts will be heated, but also will become policy, in the next couple of years.
0:32:28.6 NR: Democrats, I think what's interesting is I think all of this, it contained a number of tax changes. The Tax Cuts and Jobs Act, and some of them there's like very broad political support for retaining, right? The tax cuts, the rate cuts on middle class and sort of lower income Americans are very popular, as is the expansion of the Child Tax Credit. The bigger standard deduction that is cut itemizing rates is also popular. So I think there's a lot of broad agreement there, and I think Democrats generally sort of support that and Republicans are very much okay with those tax cuts remaining in place as well. There are thornier issues like the limit on state and local tax deductions. Like after the TCJA, you can only deduct up to $10,000.
0:33:05.0 NR: Every state and local taxes, which for many states in the country goes well into the distribution of state and local tax payments. But for coastal blue states, this really limits deductibility and raises average tax rates. And so I think within the Democratic party, there's a lot of disagreement about that piece of the TCJA. And then of course there's the tax cuts to top earners that I think the Democrats very much wanna see expire. The Republicans really wanna keep the whole package together because those tax cuts for top earners is a big priority for their voters. So this debate as to whether we carve it up, we keep it together, and what parts of it get extended I think will be very heated in coming years. And it'll be a big part of sort of tax policy as debated in the coming campaigns.
0:33:48.3 JK: Okay, great. Yeah, thanks to you both. This has been very enlightening.
0:33:51.9 BN: Yeah. Appreciate your time.
0:33:54.3 NR: Thank you.
0:33:55.3 JS: Thanks for having us.
0:34:01.0 JK: In today's interview segment. Continuing on our tax related theme, we'll talk with Professor Scott Rick about the ways that spouses shape each other's spending habits. Scott, thanks for being here.
0:34:09.8 Scott Rick: Thanks for having me.
0:34:11.2 JK: Could you tell us a little bit about yourself?
0:34:11.4 SR: Sure. I'm a marketing professor here at Ross. Been here about 11 or 12 years. It's been fun. I do research on how people make spending and saving decisions and, in recent years, I've looked at how couples navigate these issues together. A lot of research looks at financial decision making from a individual perspective, which is useful, but boy, a lot of the really impactful stuff is often made jointly or discussed jointly at least. And so that really seems worth taking a close look at.
0:34:47.3 JK: Cool. A college professor of mine who taught human relationships liked to say, "Opposites attract, but sameness stays together." And that seems to apply to your research, which finds spouses often grow more alike as it relates to money management. Does that sound fair?
0:35:04.4 SR: Yeah. So, we do find that, this is one case where opposites tend to attract. We find that tightwads and spendthrifts show some pattern of marrying each other much more so than marrying someone like themselves. And we think this is probably fun at first. There's a lot of research and sociology on fatal attractions. So like an introvert might be quite taken with an extrovert at first. Like it's this whole new world. And I'm not used to interacting with people like this. And again, that's fun at first, but over time, yeah, the sameness is usually better for relationships.
0:35:46.9 SR: So if the extrovert is fun at first, then over time it's like, "Well, this is exhausting me. I need some alone time. I can't do this all the time." You see that with spending as well where it can be fun at first, particularly for a conservative spender who we call a tightwad, if they marry a spend thrift, someone who's more loose with money. Again, that can open a whole new world for them. But boy, when it comes time to decide about where to live or what kind of careers to pursue or what kind of car to buy or how many kids to have, that makes it kind of messy. Yeah.
0:36:23.4 BN: So I understand that you've researched more than 1300 couples and this work will be published in a forthcoming book next year. What else can you tell us about that?
0:36:31.8 SR: Yeah, so, yeah, the couples that... That's when we were studying kind of who tends to marry who. And we measured it a few different ways and that's where we found this kind of pattern that we call fatal fiscal attraction, where we found that there's this surprising tendency for tightwads and spendthrifts to marry each other. And again, on the sameness point, we found that the more they're alike, the happier the marriage is. And we do find that spouses tend to look more alike over time, a little bit. And I think there's two things happening here. One is that you need to do that to survive the marriage, so to speak. There has to be some kind of tempering of the extremes. And I think the people who don't do that and just remain kind of extremely different, I think those marriages are more likely to end and drop out of the sample. And so I think both things are going on there.
0:37:34.8 JK: We all know that tax day is approaching and many of us are dealing with that. Has your research looked at how taxes and paying them or not paying them affects relationships?
0:37:47.3 SR: Well, the not paying part would be interesting kind of, if you're on the run, maybe put that on the to-do list. But yeah, I don't love tax time from a couple's perspective because it can really make income differences between spouses salient. And I don't think that's a good thing. I mean, it's important to know kind of how the household is doing and what we could be doing better to kind of secure our financial futures. But you don't want to have this annual kind of throwing it in each other's faces how much everyone makes. And I think if you can hide income differences to the extent possible, kind of pool the money, it's our money, that's better for, I think, couples well-being. So yeah, I don't love this moment. In fact, I'd say, if you can afford it, outsource it to the extent possible to a qualified person and let them deal with this.
0:38:52.7 BN: We've been through a lot in the last few years, economically and otherwise, between the pandemic supply chain disruptions and stubbornly persistent inflation. Have these sorts of upheavals shown up in your work, and if so, how?
0:39:10.1 SR: Yeah, a little bit. I think the pandemic and everything that's come with it has probably created more tightwads, people who are in their formative young adult years, when you have this kind of extreme anxiety over money, I think that can persist over time. And so I think you'll probably see a bump in the amount of tightwads that are out there, and then that's something we plan to follow up on in the coming years. But if you're past young adulthood and you have these kind of well-developed reactions towards spending, it's hard to shake those even when your objective reality changes. That's part of the reason why you see rich tightwads. They grew up struggling and they've learned to protect themselves by making spending painful and then they get money, but you can't shake this reaction that you've cultivated over many years.
0:40:15.5 SR: And so there's some real stickiness there. I always bet on status quo when it comes to this kind of thing, and I've seen that over the years looking at this. There's a lot of stability in this, but as far as spending and economic anxiety, you do see these interesting little patterns come up. Like there's this famous kind of lipstick effect where, in times of crisis, you do cut back on more optional luxuries, but you want... You still want your fun, you still want affordable luxuries. And so obviously, when people were locked down, you saw this big dip in lipstick purchases, but you saw this big increase once locked down kind of loosened up. It's something that can make you feel better and it doesn't cost that much, it's not always necessary, but... There was this boom in baseball cards when lockdown happened. It's just these kind of fun little affordable, optional things that really grow and appeal in these times.
0:41:22.5 JK: I love the phrase tightwads and spendthrifts. It sounds like a line from my favorite things "tightwads and spendthrifts." What's your biggest take away from all of your research into the relationships of tightwads and spendthrifts? How has your work changed your behaviors at home or in the classroom as a result?
0:41:41.8 SR: Yeah, yeah, it's interesting 'cause I am a spendthrift and my wife is a tightwad, and luckily she's a good sport about me, talking about this and writing a book about it and...
0:41:56.1 BN: And it helps.
0:41:56.8 SR: Yeah, it helps. And so it's useful. I understand why she gives me certain gifts and why I give her certain gifts and where we're coming from, and it helps to... 'Cause there can be ambiguity and things like that. I have a whole chapter on gifts in the book about what they convey, but if anything, it's made me as a spendthrift, already loose with money, make me wanna spend even more. And the idea is that... That plus the COVID, the future is not certain in a lot of ways, and I'm not throwing caution to the wind here, I'm not reading the kids' college fund or anything, but it's made me air on the side of seizing opportunities for happiness rather than hoping there'll be more later and waiting for them. So I have less guilt about being a spendthrift. There's a lot of finger wagging often around spendthrifts. It's morally wrong. You're being wasteful. I'm not so sure about that. While I do have a lot of love and affection for tightwads, I don't know, I'm proud to defend the spendthrift life.
0:43:28.1 JK: Right, because the very same scenario could lead someone justifiably to take the opposite view that you do. Right? Life is short. Life is hard. Life is uncertain. Store up your treasures. And you're like, "Hey, or I have an idea. Let's spent a little bit more."
0:43:44.1 SR: Yeah, no, I... In the course of running the book, I read Yes, I Can by Sammy Davis Jr. Kind of my spendthrift muse. Now, he took it a little too far, but I like the way he thought about balancing financial and psychological well-being. And that's really all I'm about, is finding that balance. He said, do I wanna be super old and have this giant pile of money and I'm just not even able to function and what good does that do? Yes, of course, you can leave the money to the next generation, but you also wanna leave experiences and memories and stories to the next generation. And so yeah, it's about finding the balance, and that could be one way that a mixed Tightwad spendthrift marriage is a good thing to help you find that balance. Certainly two spendthrifts together. I mean, that's a real precarious scenario when we see that. Yeah, that can be tough.
0:44:58.1 BN: So we've been focusing a lot on your pass work but you've got a new paper coming out in which you specifically study the use of joint versus separate bank accounts among married couples. What did you find in that research?
0:45:11.1 SR: Yeah, so for years, we had been seeing correlational studies suggesting that couples who had joint accounts tend to be happier, and of course it's like, well, happier couples pick joint accounts, or does joint make you happy? That was the question. So we kinda got this crazy idea, let's try this experimentally, let's find engaged newlywed couples who currently keep their money separate. And let's see if we can pay them to either keep it that way, to merge their money into a joint savings and or checking accounts or to just do what they want, and then we'll follow them for two years, and we'll periodically check in. Are you still talking? Do you still like each other? Do you wish you married someone else? Are you fighting over money? And so what we saw was that the people who are could just do whatever they want or we told to keep it separate, everyone was the same at time zero at intake, in terms of relationship happiness. But the people in the separate condition and the do whatever you want condition, you see this decline in relationship satisfaction over time.
0:46:25.9 SR: And that is the typical pattern, unfortunately. The happiest day tends to be the wedding day and then it goes down. However, the joint account couples who prompted to merge. They kind of stayed at that wedding day happiness level throughout, and actually increased a little bit. I think there are many reasons why this works, one is that they had some helpful discussions about money that they would not have otherwise had, they kind of got on the same page when it comes to their goals. And it's like I mentioned earlier about our money, it kind of hides income differences. It makes the couple more communal, I do something for you 'cause you need it, not because I'm looking for a favor later. It's better to say, "Can you do the dishes? I'm really tired," than to say, "Can you do the dishes. I did last night." You can get into that score-keeping mindset if you're not careful about it and we think the joint account help them avoid getting into that, "Here's what you did, here's what I did. Let's tally it up"
0:47:41.3 SR: You wanna get rid of score-keeping. And joint accounts are, I think, good for that. And also, if you're looking for some kind of self-controlled device, joint accounts help, because I know that you might see that I spend a bunch of money on something that I know you would just disapprove or frown at, and so it does temper some optional purchases. So it has a lot of pluses. Now, I think the ideal setting, which we couldn't do, 'cause we only had so many couples is some combination of joint and separate. Certainly what I have. I know how much everyone is taking out of joints, but I don't need to know all the details of what you do with that. That's your personal spending money, the details are up to you. You don't wanna get into fights over, you spend how much on lattes? And people think that that matters for your long-run financial well-being, which really doesn't. So you can get nitpicky. You don't wanna do that.
0:48:46.6 JK: This has been great, Scott. Is there anything else that you'd wanna add or amplify from our conversation?
0:48:51.8 SR: Yeah, if people have interesting experiences, if you found a way to manage money in an interesting way, I'm around, I'd love to hear about it. So yeah, thank you.
0:49:02.6 BN: Thank you.
0:49:02.7 JK: That's great. That wraps up our seventh episode of Business and Society with Michigan Ross. If you'd like to know more about the subjects we discussed today, look for the links in the episode notes and for more news about our faculty's work, check out the new section of our website, michiganross.umich.edu. Thanks for listening, and we hope you'll come back next time when we dive into the world of chatGPT and other issues of artificial intelligence. Business and Society is brought to you by the Ross School of Business and Michigan news. Thanks again to our guests today, Nirupama Rao, Joel Slemrod and Scott Rick. Our audio engineer and editor is Jonah Brockman. Executive producers are Jeff Karoub and Bob Needham. Until next time, this is Business and Society.