The Psychology of Money and Public Finance Günter Schmölders The Psychology of Money and Public Finance This page intentionally left blank The Psychology of Money and Public Finance Günter Schmölders Selected and introduced by Björn Frank and Erich Kirchler Translations by Iain Grant and Karen Green © Claudia Schmölders 2006 Selection and Introduction © Björn Frank and Erich Kirchler 2006 Translation © Iain Grant and Karen Green 2006 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1T 4LP. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2006 by PALGRAVE MACMILLAN Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N.Y. 10010 Companies and representatives throughout the world PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St. Martin’s Press, LLC and of Palgrave Macmillan Ltd. Macmillan is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries. ISBN-13: 9781403941695 hardback ISBN-10: 1403941696 hardback This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Schmölders, Günter, 190391 [Selections. English. 2006] The psychology of money and public finance/by Günter Schmölders; selected and introduced by Björn Frank and Erich Kirchler;translations by Iain Grant and Karen Green. p. cm. Includes bibliographical references and index. ISBN 1403941696 (cloth) 1. Economics“Psychological aspects. I. Frank, Björn, II. Kirchler, Erich. III. Title. HB74.P8S3713 2006 332.401  9“dc22 2006041756 10987 654321 15 14 13 12 11 10 09 08 07 06 Printed and bound in Great Britain by Antony Rowe Ltd, Chippenham and Eastbourne Contents List of Tables vii List of Figures ix 1G ¨ unter Schm ¨ olders and Economic Psychology: an Introduction 1 Björn Frank and Erich Kirchler 1.1 Methodology: the long way towards empirical research 2 1.2 Plan of the book 4 1.3 Schmölders and public finance today 6 Acknowledgements 13 References 13 2 Economic Psychology 17 Editors’ remarks 17 2.1 Man as a social being 17 2.2 A contrasting programme to rational theory 26 2.2.1 Introduction 26 2.2.2 From historicism to prediction 32 2.2.3 Borrowed from psychology? 35 2.3 Socio-economic behaviour research 39 3 The Private Household 49 3.1 How money is managed in private households 49 3.1.1 The head of the house and the housewife 49 3.1.2 Joint preferences 56 3.1.3 Income as a characteristic and a determining cause of behaviour in households 62 3.1.4 Thrift 69 3.1.5 Rationality and the household budget 77 3.1.6 The goals of household budget management 85 3.2 A behavioural approach to monetary theory 89 3.2.1 Introduction 89 3.2.2 The theory of money 90 v vi Contents 3.2.3 Monetary theory and empirical research 93 3.2.4 Consequences for monetary theory and policy 116 3.3 Level of aspiration and consumption standard: some general findings (with Bernd Bievert) 124 4 The Entrepreneur 136 4.1 Entrepreneurial behaviour 136 4.2 The entrepreneur in the economy and in the society of the Federal Republic of Germany 149 5 Psychology of Taxation and Public Finance 157 5.1 Fiscal psychology: a new branch of public finance 157 5.2 Tax morale and tax resistance 164 5.3 Tax justice 178 5.4 The German tax mentality 186 5.5 Tax mentality in international comparison – an overview 192 5.6 A theory of incentive taxation in the process of economic development 198 6 Psychology and Macroeconomics 211 6.1 The problem of economic prognosis 211 6.2 The liquidity theory of money 219 Notes 229 Index 246 List of Tables [Note: Schmölders did not provide all tables with titles; titles in brackets were added by the editors in this list.] 3.1 Money management by professional and income groups 52 3.2 Financial assets and financial management 53 3.3 Influence of income and age on expectations of income 68 3.4 Influence of positive income experiences on income expectations 68 3.5 Income expectation and levels of debt 70 3.6 Households which give the impression of being less well-kept use less planning in managing the budget 82 3.7 High use of calculation reduces subjective liquidity 84 3.8 Wishes more frequently discussed in households which use calculation 86 3.9 Marital status of respondents 101 3.10 [Reasons for saving, by account type] 104 3.11 [Reasons for saving, by account type, in more detail] 104 3.12 [Usual mode of payment, by account type] 105 3.13 People’s information about changes in interest rates by income 118 3.14 Consumption standard and income (in DM) 125 3.15 Consumption standard (in DM) and occupational groups 126 3.16 Consumption standard, occupational groups and income 127 3.17 Consumption standard (in DM) and education 128 3.18 Consumption standard (in DM) and life cycle 130 3.19 Consumption standard (in DM) and age 130 3.20 Consumption standard (in DM) and size of household 130 3.21 Consumption standard and expectations regarding the general economic trend 133 5.1 [Germans’ attitude to tax, by gender and age group] 187 5.2 [Germans’ attitude to tax, by education, profession and social stratum] 188 5.3 [Associations with the word ‘tax’, by profession] 190 5.4 Replies to the question ‘Do you think that people get a full service in return for their taxes?’ 191 5.5 [Perceived fairness of taxation, by profession] 191 vii viii List of Tables 5.6 [Perceived fairness of taxation and meaning of ‘tax’ for respondent] 191 5.7 Perceived variations of tax liability in relation to income decreases 201 5.8 Perceived variations of tax liability in relation to income increases 202 5.9 The breakdown of added value in manufacturing industry 209 5.10 Breakdown of an increase in the added value by factors 209 List of Figures 1.1 Tax morale and the size of the shadow economy 12 3.1 Factors influencing saving behaviour (‘tree analysis’) 112 ix [...]... incomprehensibility of the law Half a century ago, Schmölders (1959; section 5.1 of this volume) was already testing politicians in the German parliament and members of its finance committee as to their economic knowledge, and found a poor understanding of fiscal policy Tax authorities face the problem of the complexity of public finance and the complexity of the law, as well as ambiguities in interpreting and executing... explain, under modern money and credit conditions, the causal relations between money and the volume of business activity, let alone its relation to the general price level The concept of ‘volume’ of money and credit is more a consequence than a cause of a given volume of business activity Schmölders proposes to start from a wider concept of liquidity than the mere cash liquidity of banks The overall liquidity... under the impact of expectations and psychological factors This point is further elaborated in section 6.2 of this book on The quantity theory of money This paper had been prominently published, but the terminology proposed in the title did not prevail Nevertheless, the main points made by Schmölders are undisputed nowadays: neither quantity theory nor its successor, the ‘income theory of money ,... rates and the use of taxes for the provision of public goods, as well as the interaction between themselves as taxpayers and tax authorities In the end, motivation to comply or not to comply develops the respective behaviour Cullis and Lewis (1997) highlight the importance of subjective sense-making and the social construction of the taxation phenomena in providing guidelines for behaviour, and thus... regarding the question of accomplishment or neglect of their tax duties; it is anchored in citizens’ tax mentality and in their consciousness to be citizens, which is the base of their inner acceptance of tax duties and acknowledgment of the sovereignty of the state (Schmölders, 1960, pp 97–8) According to Schmölders, tax morale is best visible in citizens’ moral evaluation of tax evasion The concept of tax... Vogel, 1974), and also including knowledge as a determinant of compliance (e.g Eriksen and Fallan, 1996; Wärneryd and Walerud, 1982) This research area then progressed further, on to analyses of perceptions of justice and tax ethics (e.g Song and Yarbrough, 1978; Spicer and Lundstedt, 1976), analyses of anomalies in compliance decisions (e.g Schepanski and Shearer, 1995), and to the study of the cooperative... Torgler, in press) On the individual level, subjective knowledge and perceptions of taxes and tax non-compliance are part of social representations, as well as attitudes and behaviour intentions Attitudes, binding norms and control over one’s own behaviour in terms of opportunities to comply or not to comply can be discussed in the framework of the theory of reasoned action and the theory of planned behaviour,... Association for Research in Economic Psychology (IAREP) and the Journal of Economic Psychology were founded Today, modern economists are not only aware of the richness of motives that drive human behaviour, they also incorporate theories on human motivation into their models, and they measure their theories against data often collected or generated with great effort This was not the case in Schmölders’ time... Frey (1997) and Alm and Torgler (2006) define tax morale as the ‘intrinsic motivation to pay one’s taxes’, which Orviska and Hudson (2002) link to the concept of civic duty Civic duty proposes that people are motivated not just by a concern to maximize their own well-being, but by a sense of Recognition of the importance of tax morale goes hand in hand with the demand for a revision of the relationship... number of reasons, by now well known, as to why countercyclical fiscal policy is hard for politicians to achieve, based on the impression he received of their way of thinking Of the papers originally written in English and collected in this volume, this one is the oldest Schmölders had written four papers in English previous to it, but these notes had nothing to do with the psychology of money and public . The Psychology of Money and Public Finance Günter Schmölders The Psychology of Money and Public Finance This page intentionally left blank The Psychology of Money and Public Finance Günter. Republic of Germany 14 9 5 Psychology of Taxation and Public Finance 15 7 5 .1 Fiscal psychology: a new branch of public finance 15 7 5.2 Tax morale and tax resistance 16 4 5.3 Tax justice 17 8 5.4 The. by income 11 8 3 .14 Consumption standard and income (in DM) 12 5 3 .15 Consumption standard (in DM) and occupational groups 12 6 3 .16 Consumption standard, occupational groups and income 12 7 3 .17 Consumption