The Most Hated Product in the World is Beautifully Designed

Yesterday, I disclosed all of my investment assets to the Japanese government. A line-by-line breakdown of everything I own, printed out and marched over to the Kitazawa tax office. It feels better now. It didn’t feel great at first. 

I have a lot more to say about that, which I’ll write about another time. Today, I want to express an appreciation for international tax codes from a behavioral design perspective. They are, like a great work of art, simultaneously beautiful, poetic and capable of inflicting pain. 

My previous employer has been taking care of my taxes since I got to Japan. Now I’m handling them on my own, and I found out (the hard way) that I’ve been overdue with some declarations. In getting that sorted, I certainly went through the five stages of grief. 

I don’t read tax codes for fun, but I get weirdly excited about incentives and how we can essentially design behavior. And in the past few days I’ve developed a resentful appreciation for the talented folks who draw those tax codes up (even if they may leave something to be desired from a PR perspective).

If you think about it, a tax code is a product used by millions upon millions of people under protest. Every rule in it is a design decision: a stick, a carrot, or a guardrail. Once I looked at it with that framing, the rules that annoyed me at first (and hit me in the wallet) felt earned. 

Here are a few examples I’ve discovered:

• Japan has a 5% penalty for a voluntary late filing vs. 15-30% if you’re caught first. This is both carrot and stick, designed to reward coming forward before you’re forced to, and to discourage hiding and hoping. In my case, I wasn’t out of compliance intentionally. I had no idea of the rule until I started to explore it on my own. But I’m not gonna lie… once I understood the obligation, grappling with that first stage of denial, I did think about hiding and hoping. The rule design ensured I didn’t.

• The US has an investment vehicle (Roth IRA) that allows you to contribute a limited amount every year, and whatever you invest in grows tax-free. I assumed anyone could contribute that amount, but I learned that it’s capped at what you earned that year from work (not investments). I don’t know whether encouraging wealthy people to keep working was the intention, but it’s an interesting (and clever) side effect: even if you never need to work again, earned income can unlock a tax benefit that living off your investments alone cannot.

• In most cases, investment gains are only taxed when you sell, and even then at a different rate depending on how long you held them (not universally true, but certainly in the US). Platforms like Robinhood are cool in that they seem to make investing accessible to a new generation of people, but they also inherently can speak to our brain’s gameplay instinct. The great investors… Buffett, Munger, Pabrai… always play the long game. I heard an interview with Pabrai where he said the key to being a good investor is the ability to sit and watch paint dry or watch the back of a plane seat for a few hours. But nobody wants to take the simple advice, especially when we’re young. So it’s cool how the tax code actually nudges us away from our natural attraction to games, to action, and toward a longer-term approach.

I think I’ve made the leap from bargaining to acceptance in my grieving process, because I have a new appreciation for tax code design and the ehaviors it subtly encourages. Through a design lens, it’s really neat to think about each little rule: who was this built to stop, and what does it want me to do instead? 

What’s really cool is how these rules accept human nature rather than wishing it were different.

Nobody likes admitting mistakes. We all want upside without the strings. We’re impatient, easily distracted, and can become super creative when there’s money to be made (or saved). A badly designed system asks us to be better people. A well-designed system assumes we won’t be.

So it subtly finds a way to put a more immediate, tangible reward on patience. It leaves us a quiet, dignified way to correct our mistakes. It makes payoffs generous enough to influence our actions, but puts guardrails around the obvious ways to exploit them. 

It seems to understand that an honest taxpayer and a dishonest taxpayer aren’t always two different people. Sometimes they’re the same person, five minutes apart. 

That’s what I find perversely beautiful about it. Somewhere behind an incomprehensible tax code, there’s a designer who anticipated the exact moment I would consider hiding from a problem, the exact part of the rug I’d try to sweep it under, and quietly made coming clean the more attractive option. 

Of course nothing is perfect. As an American living in Japan, I am effectively discouraged from investing in an ordinary Japanese ETF because a US rule designed to prevent offshore tax avoidance also catches people who simply want to invest where they live. Even clever guardrails can have unintended victims. 

But consider the design challenge. Most consumer products only have to make people happy enough to keep using them. A tax code has to influence millions of people who would prefer not to participate at all, and has to do that without controlling a single decision.

How do you design a system that still works when its users are actively trying to defeat it? 

I’m still not too happy about having to share every investment I own, but I respect the design. 🫡