The Paycheck Withholding Effect

Tuesday, July 3rd, 2007

One of Milton Friedman’s few mistakes was his role when he was at the Treasury in implementing federal income tax withholding from paychecks. Withholding was pitched as a convenience. In truth, it manipulates most taxpayers into being happy during tax season (I’m getting a refund!). Never mind the fact that that refund is actually the result of government overcharging you, and stealing your interest in the process.

And of course, it makes it easier for the government to raise taxes when it’s taken out of your gross pay.

That’s a long-winded introduction to this interesting article, which shows how the convenience of payment services like E-ZPass make it easier to raise road tolls without much protest from motorists.

A young economist named Amy Finkelstein started thinking about these issues a few years ago when she and her fiancé were driving back and forth between Boston, where they were living, and New York, where they were going to be married. So she collected decades of toll records from around the country and found a clear pattern.

After an electronic system is put in place, tolls start rising sharply. Take two tollbooths that charge the same fee and are in a similar setting — both on highways leading into a big city, for instance. A decade after one of them gets electronic tolls, it will be about 30 percent more expensive on average than a similar tollbooth without it.

I’ve always found E-ZPass a little creepy, for this reason and others. I’ve resisted getting it, but sooner or later I suspect I’ll have to.

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