Taxes: The Ultimate Ultimatum Game
The other day, a colleague and I lamented about how much of our variable compensation plan (VCP) bonus we lost to taxes. I jokingly told him that those taxes went for his son’s education, for roads to transport his family around the city, and for health care when his family gets sick. But on reflection, I realized my humorous retort had more merit than I first thought. I have two reasons to celebrate my bonus, one economic and one social.
The ultimatum game, popular with economic experiments, teaches that any dollar offered to you is of greater value than what you had before the offer and you should take the money regardless of questions of fairness in accepting it. The same holds true for my VCP bonus. After paying the tax bill, I have many dollars more from the VCP bonus than I had before the bonus payout. But just like the responder who only gets a small fraction of the money offered by the proposer in the ultimatum game, I’m left feeling cheated.
The social reasons for accepting a large tax deduction are easier for me to accept. As a Canadian in the 21st century, I am incredibly fortunate. The taxes that my parents paid helped give me the education that has led to well-paying employment over many decades. I see it as only fair that I make a similar investment in my children’s future. I run year-round on a paved country road, cleared of snow in winter and the shoulders graded in warmer months. I can travel within my country in safety. First responders are well-trained and caring members of our community. Though I grumble about the speed of internet access, my ability to stay connected via radio, television, telephone, newspaper, and computer far exceeds what is available to a large proportion of the world’s population. Even my political representation at all three levels of government is something I am fortunate to have, regardless of the party each leader represents. Politicians in Canada generally serve to do good for society, not for personal gain.
My taxes help to fund the systems and infrastructure that give me the standard of living I cherish. I accept the positive benefits that taxes provide and so my VCP payout doesn’t seem so disheartening with that in mind.
