Death, Taxes—and Confirmation Bias
I recently read David Foster Wallace’s The Pale King. It is, primarily, the story of an IRS employee in Peoria, IL.
I’ll let him take it from there:
“As many people here remember, in 1977, during high inflation, high deficits, and my second enrollment at DePaul, there was a state fiscal experiment in Illinois in which the state sales tax was to be made progressive instead of proportional … The idea was that the more you bought, the more tax you paid.
As almost anyone here at Post 047 could have told them, a fundamental rule of effective tax enforcement is remembering that the average taxpayer is always going to act out of his own monetary self-interest. This is basic economic law. In taxation, the result is that the taxpayer will always do whatever the law allows him to do in order to minimize his taxes. This is simple human nature, which the Illinois officials either failed to understand or neglected to see the implications of.”
This new tax structure decreed that purchases of $5 or more were taxed at a higher rate than smaller purchases.
“The result was retail chaos. At, for instance, the supermarket, shoppers … were now motivated to structure their grocery purchase as numerous separate small purchases of $4.99 or less … So, at the store, you suddenly had everyone buying under $5 worth of groceries and running out to their car and putting the little bag in the car and running back in and buying another amount under $5 and running out to their car, and so on and so forth.
Supermarkets’ checkout lines started going all the way to the back of the store … fights also broke out at gas stations from drivers being forced to wait as people ahead of them at the pump tried putting $4.99 worth in and running in and paying and running back out and resetting the pump and putting in another $4.99 and so on.
From what I understand, the high administrative costs of the new bookkeeping burden got passed along and caused an inflationary spike in Illinois, which then further aggrieved consumers who were already peeved because the progressive sales tax was economically forcing them to go through checkout lines half a dozen times or more, in many cases …
Banks saw a run on ones and change. From the perspective of administrative costs, the worst part came when enterprising businesses saw a new opportunity and started using ‘Subdividable!’ as a sales inducement. Including, for instance, used-car dealers that were willing to sell you a car as an agglomeration of separate little transactions for front bumper, right rear wheel well, alternator coil, spark plug, and so on, the purchase structures as thousands of different $4.99 transactions.
It was technically legal, of course, and other retailers soon followed — but I think it was when Realtors also got into the practice of subdividing that things really fell apart. Banks, mortgage brokers, dealers in commodities and bonds, and the Illinois Department of Revenue all saw their data processing systems buckle—the progressive sales tax produced a veritable tidal wave of subdivided-sales information that drowned the existing technology. The whole thing was repealed after less than four months.”
When I read this passage in The Pale King, I bought it, hook, line, and sinker. I even described it to a friend as if it were a real event. We had a good laugh about it. But it’s fiction.
One reason I was so quick to believe is because it sounds perfectly natural. It sounds like exactly the kind of initiative a bunch of state politicians would put forward, touting the “progressive sales tax” in lots of sappy commercials around election time about “making the rich pay their fair share.” And people’s reactions, if that tax were implemented, sound like a logical continuation of events, right?
Another reason I believed is because I hold that taxation always works this way—that it’s an incredible drain on wealth and resources, and consistently has consequences that are irreconcilable with the intended ones. (For example, I see that taxes, far from improving wealth inequality, only make the problem worse. The rich can finagle their way out of most of their tax burden by employing Ivy League lawyers and accountants. The rest of us can’t.)
Therefore, I perk up at stories of taxes gone bad and their unintended consequences. But I also realize that those stories, common as they are, reinforce my existing viewpoint.
The act of finding stories, and giving them increased weight in our brains (while also ignoring stories to the contrary) is called Confirmation Bias.
If we were to rank human characteristics according to universality, it’d go something like this:
- We all die, eventually
- We need oxygen and water to survive
- We need the affection and approval of others
- We’re susceptible to confirmation bias
As Warren Buffett put it, “What the human being is best at doing is interpreting all new information so that their prior conclusions remain intact.”
Confirmation bias could be put succinctly: Believing what you want to believe. Confirmation bias is …
“This restaurant we have reservations for is the best place in town … Eat magazine says so!”
“I know that was a tragic, senseless death, but God works in mysterious ways.”
“Yeah, Walmart lowered their prices, but that’s just a ploy for their executives to increase their profits.”
Confirmation bias is also remembering that time your crush liked one of your posts, while forgetting the thousands of posts they didn’t like.
We all do it, all day, every day. And what makes confirmation bias even more pernicious is that there’s no good cure. When we try to convince flat-earthers, for example, the the world is round, we basically tell them to get smarter—to read more, to watch more documentaries, to attend scientific lectures.
But the smarter you are, and the more well read you are, the more footholds are available in your brain for confirmation bias to latch on to. The more you study, the more you’re able to find information which proves you’re right—and the more certain you become that you are.
I knew to be on high-alert when I came across this anecdote, in Phil Knight’s memoir Shoe Dog.
One day in 1977, a bill arrived in Nike’s mailbox. It was from U.S. Customs, and it was for for $25 million.
“Our American competitors, Converse and Keds, plus a few small factories, were all behind it. They’d lobbied Washington, in an effort to slow our momentum, and their lobbying had paid off, better than they’d ever dared hope. They’d managed to convince customs officials to effectively hobble us by enforcing this American Selling Price, an archaic law that dated back to the protectionist days, which preceded — some say prompted — the Great Depression.
Essentially the American Selling Price law, or ASP, said that import duties on nylon shoes must be 20 percent of the manufacturing cost of the shoe — unless there’s a “similar shoe” manufactured by a competitor in the United States.
In which case, the duty must be 20 percent of the competitor’s selling price. So all our competitors needed to do was make a few shoes in the United States, get them declared “similar,” then price them sky high — and boom. They could send our import duties sky high, too.
And that’s just what they did.
This story crystalized my view that contrary to popular belief, government—via regulations, taxes, tariffs, etc.—makes it easier for companies to establish monopolies, not more difficult. It is primarily through leveraging government power — through networking with congresspeople and back-door dealing with senators — that a company can drive out a competitor, as Converse and Keds tried to do toward Nike.
I couldn’t help my snap reaction to believe, but I also knew to be on my toes for confirmation bias and I dug further. Knight’s story turns out to true—and it’s not just him saying it.
We’re all victims of confirmation bias all the time, but that doesn’t mean that nothing is ever true or right. It doesn’t automatically invalidate every argument. It does, however, place the onus on each of us: We must be aware of it, we must acknowledge it when relevant, and we must give the benefit of the doubt to people who do acknowledge it over those who don’t.
If you enjoyed this story — and even if you didn’t — you should check out my book, Ticketless: How Sneaking Into The Super Bowl And Everything Else (Almost) Held My Life Together.
