Next week marks the end of an arduous annual civic ritual, the filing of income tax returns. It should come as no surprise that the many hours Americans spend with Turbo Tax or at an H&R Block office influence the way they perceive the tax code. Unfortunately, their experience focuses their attention on “loopholes,” rather than tax rates, and encourages confusion about some of the major tax changes being discussed by this year’s presidential candidates. Policymakers should consider how to use the civic obligation of tax filing as an opportunity for civic education about the true structure of the income tax.
To better understand how Americans respond to tax filing, I interviewed 49 taxpayers across the country and found they often see the process as a hunt for their own personal “loopholes.”
Many talked about receiving some kind of deduction or credit. A single mother, for instance, recalled vividly the first year she missed out on the Earned Income Tax Credit because her son aged out of the program. A young man from Indiana considered income tax filing “a little puzzle,” that allowed him to be as “innovative” as possible finding savings. A veterinary technician from Florida found that same process stressful. “Even after it’s done and over, I’m thinking, What could I have added? What else could I have counted?”
Taxpayers often make the mental leap from their own small exemptions to the presumed accounting tricks of the 1%. A 56-year-old woman from California first described going to “some kind of H&R Block expert,” and then contrasted her experience with those who can afford to hire a “hotshot accountant” to “hide” their money more effectively than average people.
Thus the filing process influences how Americans believe the wealthy are escaping their tax responsibility. “I think the richest pay too little nowadays,” a 51-year-old IT technician told me. “They’ve got their resources to exploit all the loopholes and they end up paying too little.”
This strong focus on loopholes drives some common misperceptions about how major tax reforms affect taxpayers of different incomes.
For instance, a flat tax is likely to raise taxes on the poor and lower the taxes paid by the wealthy. GOP presidential hopeful Ted Cruz, for instance, would replace the graduated brackets of the federal income tax with a single 10 percent rate, a proposal that would mostly benefit the highest-income Americans.
When I asked a mental health therapist from Georgia about such a levy, she first replied that “a flat tax would wind up with the super-rich paying less.” But then she reconsidered: “If there were no loopholes, I’m not sure,” she told me. “They might end up paying more even it were a lower percentage.” This interviewee clearly understood how percentages work and the basics of the graduated income tax. She just thought the system of rates is swamped by the effect of deductions and credits.
Similarly, politicians who promote big rate cuts try to deflect attention from the overall regressive impact of their plans by highlighting the closure of a few prominent “special interest” tax breaks. More broadly,politicians on both sides of the aisle are all-too-willing to describe all tax reform as a process of closing “loopholes.” This makes strategic sense for elected officials. It’s smart politics to use language that resonates with average Americans’ experience. But it also encourages a fundamental misunderstanding of why people at different income levels pay what they do.
Law professor Lawrence Zelenak has argued that the filing process serves “the important civic purpose of recognizing and formalizing the financial responsibilities of citizenship.” But to the extent that the taxpaying experience misinforms Americans about tax policy, it can hinder their capacity to exercise another civic obligation – holding government officials accountable for their policy choices.
If Americans are learning the wrong lessons from the income tax filing process, what can be done? Instead of making tax policy less visible, policymakers should consider how to use the taxpaying process to educate and engage the public on questions of public finance. Each year, the typical American spends eight hours filing their income taxes. For a brief moment in spring, 140 million-plus U.S. households focus on a government that is often invisible. If we could improve the information Americans glean from the experience, we could turn a civic obligation into civic engagement. The income tax is already visible; let’s make it clear.