A Taxing Issue: Public Perception and the Need for Tax Reform
The public perception of the current tax code may often be skewed by media coverage, causing some to think the tax code is too complex, that everyone is not paying their fair share, and that some companies are not paying any taxes at all due to loopholes and tax exemptions.
The age of digital journalism and the number of resources online means it is easier than ever for taxpayers to learn about the tax code and how the system works. With this understanding comes the realization that the tax system may be in need of reform. What is the public perception of what that tax reform should look like, and how should that influence the shape of future reform efforts?
Is Tax Reform Overdue?
The last meaningful overhaul of the tax code was the Tax Reform Act of 1986. History does show us that this style of tax reform had a positive impact on growth over the long term .
However, since the reform in 1986, other competing nations around the world have made significant changes to their corporate tax laws. This has had the effect of taking the US from having a nearly equal tax burden to having a much higher one. In addition, the effective tax rate in the US is higher than rates in other countries. While some companies can leverage exemptions and lower taxable income, they are still subject to higher rates and a more complex code in the United States than in other nations .
Since foreign corporate earnings are not taxed until they are repatriated, the incentive is for companies to reinvest that money anywhere but in the US to avoid additional tax burdens. Thus they do pay fewer taxes on many foreign holdings, making the public perception in some ways correct .
However, this is in large part due to parts of US tax code that do not apply in other nations. Of the 34 nations in the Organization for Economic Cooperation and Development, 28, including Japan have adopted tax systems that partially or entirely exempt foreign tax income. According to a 2015 study by the Tax Foundation, the US ranks last in corporate income tax competitiveness compared to OECD countries .
As to personal taxes, the current seven bracket system and many deductions may be considered out of date, and can be reformed. Although few people ever actually pay estate taxes, the rates are perceived to be too high and some believe it should be eliminated entirely .
Are Taxes Unfair?
Following the 2017 tax season, a Gallup poll shows that 45 percent of Americans think the poor pay too much in taxes up from 41 percent in 2014, but 21 percent think they pay too little, up from 10 percent previously.
Taxpayers have a slightly different opinion about what the middle class pays. Nearly the same number, 46 percent, say the middle class pays too much, but only 6 percent think they pay too little. This may be in part because many Americans identify as “middle class” even if that description does not describe their situation accurately .
Still, the overwhelming majority, 62 percent think the rich should pay more, and 6 percent think corporations pay too little as well . A group called Citizens for Tax Justice bears this out with their research, showing a large number of recognizable corporations that paid little to no taxes over the last five years .
While these recognizable corporations might not be a representative sample of all large corporations, such studies do alter public perception of the taxes companies and the top income earners in the country pay. It is this type of “fairness” discussion that makes the public hungry for tax reform.
Is the tax code too complicated?
Taxpayers have a fear of not complying properly, so nearly 94 percent enlist costly outside help to complete relatively simple tax forms, from guided software to tax accountants .
From the entrepreneurial side of things, the rules and regulations regarding deductions, what counts as income, depreciation of assets, and many more issues may plague potential businesses, costing them money and raising levels of distrust and fear even higher .
In many ways, this is well founded. The IRS has 1,050 forms one might have to fill out, and the average time needed to file a return is 11.1 hours. This means the total burden on taxpayers annually is 8.9 billion hours .
This inefficiency at both the taxpayer and agency level results in a huge negative economic impact. A study by Fichtner and Feldman showed that between foregone economic growth and lobbying expenditures, hidden costs of the tax code range between $215 and $987 billion annually .
Much of the way the current tax code is enforced, the paperwork and specialized knowledge required for filing, and inefficiencies in the system fail simple cost-benefit analysis and can ultimately reinforce taxpayer mistrust.
Public perception of tax reform is driven in a large part by digital media and self-education through internet resources. This public perception can be used to shape future tax reform not only to increase efficiency and reduce rates overall, but to make a painful subject more palatable to the average taxpayer. In addition, public perception of tax reform can be influenced by academic institutions and post graduate studies in taxation. For example, at Villanova University’s Graduate Tax Program, students who are pursuing a Master of Taxation (MT) degree, or a Master of Laws (LLM) in Taxation degree engage in discussions about tax reform, and look closely at how public opinion can and should influence tax policy. These discussions address the historical impact of taxation on individuals and businesses and compare our system with other country’s tax regimes. The desired outcome is to develop and drive thoughtful, rationale and equitable approaches to tax reform.