Iwan Djanali ’09 and Damien Sheehan-Connor, assistant professor of economics, are the authors of an article, “Tax affinity hypothesis: Do we really hate paying taxes?” published in the Journal of Economic Psychology. The paper resulted from Iwan’s senior thesis at Wesleyan. The article, which was published online in February, will appear in the August 2012 issue of the journal. It can be read online here.
Through an experiment using 66 Wesleyan undergraduate students as subjects, Djanali and Sheehan-Connor found evidence contradicting a well-established economic principle: that people derive no utility from paying income taxes. Standard economic analysis assumes that when people decide how much of their time to dedicate to work versus leisure, they base decisions on the hourly wage rate after taxes. Put another way, raising taxes by a certain amount has the same effect on a worker as lowering his wages by the same amount.
Challenging this thinking, Djanali and Sheehan-Connor decided to test the hypothesis that people do, in fact, derive utility from paying taxes because of their “pro-social tendencies.” They found statistically significant evidence that, at the same net wage rate, subjects worked more in the presence of a tax than its absence. In addition, they found that the impact of wage changes on the amount subjects worked depended not only on after-tax net wage rate, but also on the tax rate. These findings have important implications for tax policy and economic analysis.