Lilian V. Faulhaber, The Hidden Limits of the Charitable Deduction: An Introduction to Hypersalience (Boston Univ. School of Law, Public Law Research Paper No. 12-02, 2012).

As Lilian Faulhaber describes in her article, The Hidden Limits of the Charitable Deduction: An Introduction to Hypersalience, salience recently has become a hot topic in tax scholarship.  This increasing focus on salience arises out of the behavioral economics school.  No longer are taxpayers assumed to be rationally maximizing their utility in the manner that economic models might predict.  Rather, behavioral economics suggests that they often rely on mental shortcuts, or heuristics, to make decisions.  As a result, scholars have suggested and, to some extent, documented how the salience, or prominence, of a tax provision may determine taxpayer responsiveness to the provision.  Scholars have identified two types of salience: market salience (the impact of salience on market, or economic, activity) and political salience (the impact of salience on political outcomes).  Faulhaber’s article addresses the scholarship regarding market salience.  As Faulhaber describes, the primary focus of such scholarship has been on whether and how low salience taxes (sometimes referred to as “hidden taxes”) may cause taxpayers to underestimate the true cost of taxation and thereby potentially reduce behavioral distortions from taxation, which many view as the Holy Grail of tax policy.

However, Faulhaber astutely notes that this perspective regarding salience is only one side of the “hidden tax coin.”  Faulhaber explains that low salience tax provisions only cause taxpayers to underestimate the true cost of taxation when the tax provisions are revenue-raising provisions.  Since scholars have not focused on revenue-reducing tax provisions, they have not focused to any great extent on the phenomenon that Faulhaber introduces in this article: hypersalience.  Hypersalience, as Faulhaber defines it, is “the phenomenon by which the prominence of a tax provision leads taxpayers to overestimate its incidence.”  Hypersalience exists when there is a highly salient tax-reduction provision, combined with low salience restrictions or limitations on the tax-reduction provision.  Faulhaber’s introduction of hypersalience into the tax literature is important for a number of reasons.  First, Faulhaber’s discussion adds an important new dimension to the increasingly prominent salience scholarship.  Second, Faulhaber’s focus on hypersalience allows her to delve into a number of resulting, pressing policy issues, which have not previously been examined.  Finally, Faulhaber’s general discovery of hypersalience illustrates a basic but fundamentally important lesson: Behavioral economics phenomena do not operate in a vacuum.  Rather, how they affect taxpayers depends on how they actually interact with particular tax provisions and with the administration of such provisions. Continue reading "Hypersalience and Why Understanding Behavioral Tax Law and Economics Means Understanding Tax"

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