IF YOU WANT PEOPLE to do something, make it easy. That’s the big idea behind a nudge, which helps people do the right thing for themselves. It turns out that nudge has an evil twin, called sludge. Sludge makes the right thing harder to do. If you look around, sludge is everywhere.
“If you cannot get financial aid without filling out a twenty-page form, then you have been subjected to sludge,” behavioral economists Richard Thaler and Cass Sunstein write in the new “final” edition of their bestselling book Nudge. “If you cannot obtain a student visa without having four rounds of interviews, you are facing sludge.”
Sludge has gone by many names in the past: red tape, bureaucracy, paperwork. Whatever you call it, it’s annoying. So what’s new? Thaler and Sunstein argue that policymakers can achieve great things at a small cost by clearing sludge away. Things like reducing childhood poverty and saving lives, as you’ll see.
But first, why is sludge there?
Sometimes, it’s an honest attempt to ration scarce resources. I registered for a COVID-19 vaccine last winter. Nursing home residents, health care professionals, K-12 teachers and smokers were given higher priority. I waited in line for the greater good of my community.
Other sludge is created to deliberately trip us up. Thaler offers this example: He wanted to read a review of his book in a London newspaper, which had a paywall. A one-month trial cost just £1, payable by credit card. Easy. After that came the sludge: The subscription would automatically renew at £27 pounds per month. To cancel, he writes, “You had to call the London office, not on a toll-free line, during London business hours!” Thaler, who lives is in Chicago, passed on the trial.
Another sludgy business practice is mail-in rebates. The promise of a discount may move merchandise because 80% of us think we’ll have our rebate within 30 days. Problem is, only 10% to 40% of buyers will jump through all the hoops required to get that rebate check. In one study, consumers were clearly told about this in an effort to motivate them. It had zero effect.
“There is a general (sad) lesson here,” Thaler and Sunstein conclude. “Telling people that some activity is dangerous (running up large credit card bills, binge drinking, unprotected sex)… is not much help.” The only intervention that reliably works, they say, is “the magic elixir” of making it easy. When the rebate form was made easier to mail, the redemption rate rose to about 54%.
Sometimes sludge is just senseless—even when lives are at stake. Opioid overdoses killed a record 93,331 Americans in 2020. Yet doctors couldn’t prescribe Suboxone, the gold standard treatment for heroin addiction, without an “X waiver” from the federal government.
Many busy doctors didn’t complete the lengthy training required for a waiver, Sunstein notes in his own new book, called Sludge. They might stabilize an overdosing patient in the emergency room, he writes, but—because they didn’t have the waiver—they were prevented from prescribing long-term treatment. Citing the belief that this sludge costs lives, the Secretary of Health and Human Services waived the waiver last April.
Sludge-busting is having a moment right now in Washington. Rather than requiring parents to file taxes to get the child tax credit, the government is paying it forward. If you qualified in 2020, it reasoned, you’d likely qualify again in 2021.
The IRS is direct depositing monthly checks in parents’ bank accounts from July to December in a one-year experiment. More poor households were made eligible for the child tax credit as well, and payments increased from $2,000 to up to $3,600 annually. The combined effect has reduced U.S. child poverty by 25%, according to an early analysis by researchers at Columbia University.
Parents will have to file a tax return to claim the credit again next year, however, unless legislation is passed to make the experiment permanent. That brings us to the Holy Grail of sludge busting—making tax preparation easy. Americans spend 13 hours a year, on average, filling out tax forms. The forms are so daunting that 94% use a tax preparer, either a human or a computer program.
It doesn’t have to be this way. The IRS has all the information it needs to prepopulate simple tax returns for millions of taxpayers, according to Austan Goolsbee, former chair of the President’s Council of Economic Advisors. Thaler and Sunstein estimate that 90% of us have such simple returns that we could use such a service.
Thirty-six nations already practice this kind of form-free tax filing for some of its citizens, according to the Tax Policy Center. Almost three-quarters of Swedish citizens get a completed tax return in the mail from the government, for example. They might spend 15 minutes double-checking the numbers before signing the return by sending a text message.
Greg Spears worked as a reporter for the Knight Ridder Washington Bureau and Kiplinger’s Personal Finance magazine. After leaving journalism, he spent 23 years as a senior editor at Vanguard Group on the 401(k) side, where he implored people to save more for retirement. Greg currently teaches behavioral economics at St. Joseph’s University in Philadelphia as an adjunct professor. The subject helps shed light on why so many Americans save less than they might. He is also a Certified Financial Planner certificate holder. Check out Greg’s earlier articles.
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Some of the tax laws are so complex that a person without training could be hard pressed to get it right even with tax software. I volunteered for many years doing free income tax preparation for low- and middle-income clients. The rules for who is eligible for the earned income credit (EIC) are particularly complex. The fiancé of a friend of mine asked me for help with his taxes. He lived with his disabled mother and his younger sister but didn’t support them significantly. After thinking it over for a couple of days, I realized that his sister was a “qualifying child” for both him and his mother for EIC. Only one of them could claim her and his mother had priority but she had no earned income so she wasn’t eligible for EIC anyway. He ended up getting several thousand dollars due to the EIC.
How much Social Security is taxable is between 0% and 85% as determined by a very complex formula.
After my father died, I found that he had kept all of his tax returns. One year during WWII all he had to do was fill in a couple of blanks on his W-2 and send it in. When I first filed income taxes in the late 1960s the NY State form was half a page. Now it’s 6 pages.