Behavioural Economics and Complex Decision-Making Implications for the Australian Tax and Transfer System

See on Scoop.itBounded Rationality and Beyond

Individuals are faced with an increasingly complex arra y of decisions in their day to day lives. Economic growth and deregulation has greatly increased the c hoices available to people in Australia, as in other comparable countries. For example, where 30 years ago households had access to a single type of telephone connected to a single network, there are now a plet hora of technologies, companies and pricing packages. Similarly with financial and investment products , the number of choices has increased massively. Households now have access to many different types of mortgage and a great range of different ways in which they can invest their savings. While this increase in the range and diversity of choices undoubtedly brings many benefits, it does require people to make ever more complex decisions. For huma n decision-makers, particularly those with limited knowledge and experience, this can be a difficult t ask. At the same time individuals are increasingly responsible for their own finances, for example as personal superannuation replaces company pensions. With increased choice comes increased risk of costly error. Ma ny people feel there are too many choices and they do not have the knowledge required to make many of the decisions which are expected of them (Fear 2008; ASIC 2009). As people’s financial circumstances have become more co mplex, so too have their interactions with the tax and transfer system. To some extent there is an inevitable arms race between financial innovation and tax complexity. As new financial instruments emerge, including many specifically designed to minimise tax, tax law must also evolve to deal with them; and as tax la w changes, the finance sector is quick to respond with innovative products and strategies. This has resulted in a complex and continually changing tax and transfer system which may not be well suited to the vagaries of human decision-making. http://taxreview.treasury.gov.au/content/html/commissioned_work/downloads/CSIRO_AFTS_Behavioural_economics_paper.pdf

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