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Why the U.S. tax system is so complicated — but Americans are proud to pay taxes anyway

- April 12, 2018

With tax day approaching, I discussed taxes with two scholars of the U.S. system — MIT’s Andrea Campbell and the Brookings Institution’s Vanessa Williamson. A lightly edited transcript follows.

John: Andrea and Vanessa, thanks so much for chatting about taxes. Let’s start with the big question: Have you both done your taxes?

Andrea: Amazingly, I finished. Usually, I’m guilty of doing them at the last minute.

Vanessa: I have not. I am absolutely a last-minute person about this.

Andrea: I should add that I literally used to do them by hand because I felt, as someone who studies taxes, I should be deep in the weeds. Then last year, I broke down and used software, like most Americans, who use software or tax prep services.

John: So my wonderful wife has taken the lead on our taxes for several years. This year, it also involved an accountant and a stack of documents that was an inch thick. So this leads to my question: Why is doing income taxes in the United States seemingly so complicated?

Vanessa: I think there are two answers. The most proximate reason is because tax preparers would like to keep it that way. But there’s also a deeper question about why we do so much social policy through the tax code.

Andrea: Yes, two reasons tax filing is so complicated in the U.S. are (1) we do a great deal of social policy through “tax expenditures” and (2) we tax households rather than individuals.

John: So what are “tax expenditures,” and what does it mean to “do social policy” through the tax code?

Vanessa: A “tax expenditure” is basically a form of government spending, but one delivered through the tax code. We use the income tax code to encourage and discourage a lot of different social and economic behaviors. So, for instance, let’s say that the government wants to encourage homeownership or employment or child care. They could set up a program to do those things — or they can just give homeowners, workers and parents a special break in the tax code.

There are problems with tax expenditures, though. First, as we’ve already noted, they make taxpaying more complicated, which frustrates people. Second, as Suzanne Mettler has shown, these tax expenditures are often difficult for Americans to notice, and they can be very regressive.

John: “Welfare for the wealthy,” as Chris Faricy has noted.

Vanessa: Exactly! That book is sitting on my desk right now.

Andrea: Unlike many other countries, we make people administer their own benefits through the tax code. One example involves the cost of raising children. Some countries have directly administered benefits, like universal preschool or family allowances. In the U.S., eligible households with children receive subsidies as well — the child credit, the child care tax credit, the Earned Income Tax Credit — but only if they fill out their tax return correctly. If you fill out your return wrong, you can be fined. That’s one reason that the majority of even low-income Americans use paid tax preparation services.

John: Why does it matter that the U.S. taxes households not individuals?

Andrea: It probably seems natural to us that we calculate taxes for households (such as married couples filing jointly). But in many other countries, individuals are taxed instead, which makes it easier to calibrate withholding to actual taxes owed. In American households with two earners, the second earner’s tax rate begins where the first earner’s tax rate ends. So it’s difficult to get withholding just right, and one major reason we all have to fill out complicated forms by April 15 every year is to reconcile what taxes we had withheld with the amount we actually owe.

Several dozen countries utilize a return-free system for most taxpayers in straightforward situations. In Sweden, you can see your tax forms already filled in and approve them on your cellphone.

John: Let me ask this: Don’t we like the deductions we get through the tax code — like for mortgage interest? Aren’t Americans a bit complicit in the complexity of our tax code?

Vanessa: We should start by being clear about who itemizes their taxes. A lot of special tax breaks are only available to wealthier people, for whom it is worthwhile to itemize. (This may become even more true under the new tax law.)

Andrea: Surveys show that tax breaks like the home mortgage interest deduction and the deduction for charitable contributions are indeed popular with the public.

Vanessa: Also, conventional wisdom here in Washington is that the home mortgage interest deduction is politically untouchable, not because of taxpayers so much as the power of the real estate lobby.

Andrea: Indeed, many of the tax breaks that make the tax code look like Swiss cheese have their defenders. And it’s the tax prep industry itself that has fought a return-free system. The complexity of the code affects how people feel about the legitimacy of the system. In surveys about what bothers them the most about taxes, far more people cite the complexity of the system than the amount they pay.

Vanessa: This is exactly right. The top answers to what bothers people are typically 1) that the wealthy and corporations aren’t paying their share and 2) that the tax code is too complicated.

John: Yes, let’s talk about that. Vanessa, you have a recent book: “Read My Lips: Why Americans Are Proud to Pay Taxes.” That seems, um, a little contrary to the conventional wisdom.

Vanessa: It’s a catchy title!

John: So what is the conventional wisdom missing?

Vanessa: Americans see taxpaying as a civic responsibility, a part of being an upstanding citizen. In surveys, overwhelming percentages of Americans (90-plus percent) see taxpaying as a “civic duty.”

When I saw these surveys, I was suspicious. I thought people probably did not think this way of their own accord. But in interviews I conducted for the book, people often discussed taxpaying in terms of patriotism and doing what is right for the country. It’s part of a very long tradition that dates back to the founding of the country. And this helps explain why people are so angry when they think someone else is not paying their share!

Andrea: I highly recommend Vanessa’s book! There is lots of evidence that complexity takes a toll on people’s views on the tax system and government: They look at the extraordinarily complex instructions for the 1040 form, the many lines of deduction and credits that don’t apply to them but must be relevant for some rich person, and conclude, understandably, that rich people are getting away without paying their fair share. So our system undermines citizens’ natural patriotism.

Vanessa: One thing that might be surprising is that the partisan divide doesn’t break exactly as you would expect. For instance, in the surveys I’ve looked at, Republicans are slightly more likely than Democrats to say avoiding taxes is wrong. And, though Republicans are more likely than Democrats to say they are bothered about the amount of taxes they pay, they are also more likely to say they are bothered by complexity or tax avoidance by the rich.

Andrea: Another problem is that the complexity can lead people to support “simplifying” reforms that would actually leave them worse off. A flat tax is one example. Many lower- and moderate-income people support a flat tax even though their own taxes would go up under most such scenarios, while the taxes of high-income people would fall substantially.

John: So let me ask this. Basically, we’ve discussed how (1) people actually don’t mind paying their taxes but (2) they’re put off by the complexity of a process that (3) reflects the power of certain interest groups who have helped make the tax code complex. But it’s not clear that obvious simplifications — like “tax return on a postcard” — would help most people. So is there any politically viable way to make our tax system less complicated?

Vanessa: It’s been stymied in the past, but pre-prepared returns from the government has potential appeal. But if we aren’t going to make income tax preparation easier, at minimum, we could make it more informative or useful. Tax day is a regular interaction between Americans and their government.

Andrea: There are also some proposals out there like that of Columbia Law Professor Michael Graetz, which exempts the first $100,000 of income for married couples ($50,000 for singles) and adds a consumption tax (a value-added tax), which the U.S. doesn’t have but which 190 other countries do. Thus it takes the majority of households out of the federal income tax system.

Maybe it’s not simpler, but the idea is to follow the economists’ dictum that we should tax things that are bad (consumption) and not so much things that are good (income).

John: Politics is often unkind to the dicta of economists, alas. Thanks again to you both.

This Monkey Cage Chat was produced in collaboration with the Media & Democracy program at the Social Science Research Council.