Here on the East Coast, the rise of the EZ-Pass method of collecting tolls on highways has certainly eased congestion. But has it eased the way we keep track of the costs?
In an interesting study conducted by economist Amy Finkelstein, it seems that, indeed, the easier it has become to collect tolls the easier it's become to raise them:
Unlike manual toll collection, in which the driver must hand over cash at the toll collection plaza, electronic toll collection automatically debits the toll amount as the car drives through the toll plaza, thereby plausibly decreasing the salience of the toll (making it less conspicuous). I find robust evidence that toll rates increase following the adoption of electronic toll collection. My estimates suggest that, in steady state, toll rates are 20 to 40 percent higher than they would have been without electronic toll collection.
The NY Times picked up this story, touching upon other aspects of this type of hidden tax:
The implications of this go well beyond highways. We increasingly live in an E-ZPass economy, in which bills are paid online, corporate cafeterias are going cashless and people take along their debit card, instead of cash, when they leave the house. Last year, 55 percent of consumer spending was done electronically, mainly with credit and debit cards, while checks accounted for less than 25 percent and cash only 20 percent, according to Visa. As recently as 2003, only 45 percent of spending was done electronically.
Furthermore:
Marketers understand this dynamic well, which is a big reason they promote refillable gift cards and other forms of money that don't feel like money. Part of what's so intriguing about Ms. Finkelstein's work is that it suggests that government officials may be coming to understand the dynamic, too.
Milton Friedman, who was instrumental in creating the withholding system for income taxes, wrote in his biography:
"It never occurred to me at the time that I was helping to develop machinery that would make possible a government that I would come to criticize severely as too large, too intrusive, too destructive of freedom."
Indeed, other economists have conducted studies of tax salience and it's impact on consumption, such as Raj Chetty of the University of California:
Mr. Chetty argues that the complexity of today's tax code ends up aggravating inequality. Both rich and poor families face a dizzying spectrum of tax laws, from carried-interest rules to the earned-income tax credit. But affluent families are better able to navigate the system, often by hiring an accountant. Also, the little day-to-day taxes, like highway tolls, mean a lot more to a moderate-income family.
As we drive the highways this July 4th and zip through that EZ Pass toll, see if you remember to check whether the fare has gone up. Although necessary to fund our highway system, this little hidden tax is obviously much easier to pay if we don't keep track of it's costs relative to previous years.
Human nature is funny that way. Out of sight, out of mind, right?
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Tags: consumption, EZ Pass, hidden toll, taxes
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