The Tax Bite

What Americans think about what they're paying

2014 Tax Fairness Survey Share

by John S Kiernan

Reprinted with permission from Wallethub.com

Tax policy—who pays what and how—is a hot-button issue. Politicians from both parties cry out for reform yet there is little consensus about what needs to be done. And while politicians and pundits argue, everyday Americans are struggling to navigate an increasingly complex tax code.

With tax season behind us and the 2014 midterm elections ahead of us, we thought now would be a good time to find out what exactly Americans think of our current tax system and how it could be improved.

To investigate attitudes towards taxation, WalletHub.com conducted an original online survey of 1,086 Americans. The sample was designed to be nationally representative of all Americans by age, race and gender.

Key Findings:

  • More than 80% of respondents rated the current tax code as either “complex” or “extremely complex”
  • More than 40% respondents (44.2%) believe the fairest possible tax code would have fewer deductions than today.
  • 90% of respondents believe income from investments should be taxed at least as much as wages: Well more than half (57.64%) think wages and investment income should be taxed equally; 33.06% say investment income should be taxed more than wages
  • Less than one quarter (24.31%) of respondents support a flat income tax.
  • Almost two-thirds of respondents (65.10%) believe corporations should face higher tax rates than consumers.
  • Americans view taxes on wages and gasoline as least fair; taxes on alcohol and tobacco seen as most fair.
  • Americans view tax fairness (61.23%) and tax equality (20.81%) as more important than whatever is best for the economy (17.96%).

Tax Code Complexity

We first asked respondents how complex they would rate the current U.S. tax code:

  • When asked how complex they found the current tax code, over 80% responded the current tax code was either “complex” or “extremely complex.” Only 2% of respondents responded they felt the current tax code was simple or very simple.
  • In a multivariate regression framework, education appears to be positively associated with viewing the current tax code as too complex—that is, the more educated you are the more complex you find the current tax code to be. This is net of differences by income, sex, age, race and region of the country.

One thing that makes our current system so complex is the number of deductions in the tax code. So we asked respondents whether they thought the fairest possible tax code would have more, less or the same amount of deductions, relative to the current U.S. tax code.

  • Less than 1 in 3 respondents think a fair tax code means more deductions.
  • Descriptively, older individuals in our sample were generally more likely than younger respondents to think a fairer tax code would have fewer deductions.
  • Men are significantly more likely than women to think a fairer tax code would have fewer deductions: 48% of men say fewer deductions would be fairer, compared to 36% of women. This difference between men and women is statistically significant in multivariate models controlling for income, age, education, race, and region of the country.

Investment & Wage Income

How to tax income from investments relative to wages has been a major area of disagreement among politicians. Current policy taxes income from investments at a lower rate than income from wages; which results in someone like Warren Buffet paying a lower effective tax rate than his secretary.

We asked respondents what they thought is the fairest possible relationship between tax rates on investment income and wages—should tax rates be higher on wages, higher on investment income, or should the tax rates be the same?

  • Over 90% of respondents believe income from investments should be taxed at least as much as income from wages.
  • Descriptively, blacks and Latinos in our sample are more likely to support higher taxes on investments than white respondents.
  • Notably, we did not see any significant differences by income, age or education. Across groups there appears to be strong support for higher taxes on investment income, relative to current policy.
Americans view taxes on wages and gasoline as least fair; taxes on alcohol and tobacco seen as most fair

Our current federal tax system has a “progressive” structure, where higher incomes face higher tax rates. Politicians routinely debate how our income tax should be structured: Should everyone pay the same tax rate? How much more should the rich pay relative to the middle class? Should the poor pay any income tax?

To determine what Americans think would be the most fair income tax system, we presented respondents with the following four charts of income tax rates by income and asked them to pick which one they felt was fairest:

 

  • Less than one-quarter (24.31%) of all respondents indicated they would prefer a flat income tax whereas more than three-quarters preferred one of the more progressive options.
  • Notable again is the difference between men and women in preferences for a flat tax. Men are more likely than women to prefer a flat tax (29% versus 20%). This difference between men and women holds in a multivariate model: net of age, education, income, race and region, men have 50% higher odds than women of preferring a flat tax option (relative to the other options).
  • It is interesting that that the most popular choice, Chart C, includes some taxation of poor households. It is hard to determine, however, which features of the tax systems depicted in the charts are driving support. We plan to dig deeper into attitudes towards taxing low-income households in future WalletHub studies.

 

Consumers versus Corporations

Graduated income tax rates aren’t the only way to make the tax code fairer. Respondents also reported that they believe corporations should face a higher tax rate than consumers:

Descriptively, we see some evidence in the data that higher income households are less likely than lower income households to support higher rates for corporations.
Yet again we see striking differences between men and women, with women significantly more likely than men to believe that higher taxes on corporations is the fairest option: 73% for women versus 55% for men. In a multivariate regression model, net of age, region, education, race and income, women have 228% higher odds than men of supporting a higher tax on corporations than consumers.

Most Fair & Least Fair Taxes

Not all taxes are viewed as equally fair. So we asked respondents to rate different taxes based on fairness using a 1 to 5 scale, with 1 being “very fair” and 5 being “not fair at all.” The chart below shows the percent of respondents who considered each type of tax to be anywhere from “very fair” to “ok” (1-3 on the scale).

  • “Sin taxes” on alcohol and tobacco appear to be considered the most fair among respondents in our sample; taxes on wages and gasoline were rated as fair by the smallest percentage of respondents.
  • Multivariate regression analyses suggest that higher income households are more likely than lower-income households to consider alcohol and tobacco taxes as fair.
  • We find it interesting that about one-third (34%) of respondents view taxation on charitable donations—that is, income tax deductions for donations—as unfair. We plan to dig deeper into attitudes towards tax treatment of charitable contributions in future Wallethub studies.

Fairness vs. Equality vs. the Economy

Tax systems can affect economic growth by influencing the actions of a range of economic actors from corporations to investors to workers. Some suggest, for example, that increasing tax rates on income from investments or on corporate profits will have a negative impact on the economy. But we wanted to know what Americans thought was most important: tax equality, tax fairness, or whatever is best for the economy.

  • Less than 1 in 5 (17.96%) respondents said that whatever is best for the economy is the most important consideration for tax policy.
  • Men appear to be more likely than women to have responded tax equality is most important (relative to the other options). This difference is net of age, income, education, race and region.

 

Read the complete survey, with charts and commentary, here.