Friday, April 07, 2006

The Tax Paradox

As I started doing my taxes late yesterday, I stumbled upon an interesting paradox involving human emotional reaction. If one is given a choice between living in the following two alternative worlds:
(a) one in which they do their taxes on April 14 every year and find that they are owed a nice big tax refund; and
(b) one in which they receive a slightly larger paycheck every fortnight, but find on April 14 that they owe the government a little money.

Why do people prefer (a) to (b), given that world (b) offers them more money (thanks to the loss of interest income on owed tax refunds)? I suspect it's because people prefer the high of one big, pleasant surprise to the even-keeled happiness of a fatter paycheck.

3 Comments:

Blogger Chandrachood said...

Makes sense..Thats human psychology. A single large sum has more weightage than a constant huge chunks of cash flows.

As for taxes, every year I tell myself..'This year I am going to make the best of it..file as quick as possible'. What happens eventually? April is here. deadline is here. taxes not filed yet! Jinx?

Chintu

4/18/2006 10:55 AM  
Anonymous Cpr said...

I definitely do NOT prefer a tax refund. I DO strive to receive as little back as legally possible by means of a refund. Before you cosider your options, you should know that Uncle Sam doesn't like it if you write him a check every Apr 15th (which we know is fair, given the interest holiday concerns). It's only people who are happy to give the government that luxury.
Some see irrational behavior, some see paradoxes?
And should you or others feel that it would be nice to get a "larger refund" for corresponding paycheck deductions, I'd be happy to arrange that!

4/21/2006 10:49 PM  
Anonymous Anonymous said...

Whose money is the refund check coming from anyway? Maybe if you gave me $20 every week and filled out a form for the $1040 at the end of the year that would make you feel very good.

4/25/2006 3:40 PM  

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