3 Startling Findings on the "Fairness" of Taxes

By Markets Fool.com


Source: Flickr user MN AFL-CIO.

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Quick -- think of the first word that comes to mind when I say "taxes." I'm willing to wager it was a "not safe for work" word or, at least, not a very nice word.

Most Americans aren't fans of doing their taxes, let alone paying them. With the rare exception of boosting Social Security payroll taxes in order to ensure the long-term survival of the program, you'll rarely find any common ground when it comes to Americans' opinions on taxes.

And really, should we be surprised? The tax code has seen more than 5,000 changes enacted by Congress since 2001, and it contains around 4 million words (that's about 62 novels' worth). How can we expect Americans to formulate cohesive opinions with the tax code as complex as it is?

How fair are taxes?
In order to get a better understanding of what Americans think of taxes in general (federal and state), WalletHub conducted a Tax Fairness Survey that polled 1,086 Americans and was released earlier this year.

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Source: Flickr user ProgressOhio.

What probably comes as no surprise is that a combined 82% of respondents believe the tax code is either "complex" or "extremely complex." I consider myself pretty knowledgeable when it comes to tax code, but even I would have to agree that the sheer number of annual changes in the tax code -- be they inflationary or enacted by lawmakers -- is utterly bewildering.

Another area of common ground (because there weren't many) is America's majority opinion that corporations should pay a higher tax rate than individuals. You can probably blame this opinion on companies like Facebook , which have been able to write off their options-based compensation given to employees and net billion-dollar tax refunds from the IRS.

However, the survey also revealed three specific responses that took me completely by surprise.

1. A plurality of respondents want fewer deductions
The first time my jaw hit the floor involved respondents' answers to a multiple-choice question about the fairness of the tax code. The question read:

The fairest possible tax code would have [insert answer here] potential deductions, relative to the current U.S. tax code.

Respondents' choices were the following:

  • Less
  • The same amount of
  • More

Source: StockMonkeys.com via Flickr.

The natural assumption would be that Americans want more deductions. However, this survey showed that only 30.6% of respondents believe more deductions would make the tax code fairer. Even fewer respondents (25.2%) chose the middle ground. The most popular answer, at 44.2% of respondents, was for the tax code to have fewer possible deductions.

Though the study offered no reasoning behind the top answer, I'd suggest it could be similar to America's dislike of corporations' sometimes paying lower taxes than individuals. Seeing big corporations pay zero or single-digit effective tax rates could sway respondents' answers.

2. Most respondents want tax fairness, whether or not it helps the economy
Secondly, I knew deep down that Americans were concerned about their own well-being, but the results of this survey paint them as downright selfish.

Here's a question posed to survey-takers on tax fairness, versus equality, versus the economy:

What is more important? Tax equality, Tax Fairness, or Whatever is best for the economy?

Before looking at the results, I had expected some parity in the answers. The result, though, was a landslide in favor of tax fairness. Tax fairness -- the idea that higher-income individuals and corporations should pay more in taxes -- garnered 61.2% of all votes compared to 20.8% for tax equality (the idea of equal taxation on a percentage basis) and just 18% for whatever is best for the economy. I guess when it comes down to it, John and Jane Q. Public are really looking out for themselves, policy be damned!

The interesting takeaway here, at least in my perspective, is that tinkering with the tax code to improve the economy is likely to benefit nearly all Americans, whereas creating a "fair" tax code may not help the economy and could actually be detrimental to certain Americans. For example, requiring corporations to pay more in taxes is likely to result in companies simply passing along these added costs back to consumers in the form of higher-priced goods and services.

3. Most respondents think investment income and wages should be taxed equally
Lastly, I was stunned by the responses to a question on investment income versus wage income. The question read as follows:

Which of the following options describes the fairest possible relationship between tax rates on investment income and wages?

The choices were:

  • Higher on wages
  • Higher on investment income
  • Equal tax rates

I fully expected there to be some bias toward taxing investment income more than it's currently taxed, and yet a whopping 57.5% of respondents desire equal taxation for wages and investment income. Another 33.1% prefer higher taxes on investment income than on wages. Just 9.3% prefer a higher tax on wages.

Source: TaxCredits.net via Flickr.

While I fully understand why respondents didn't like the idea of raising taxes on wages -- that is, consumers would prefer to keep more of their upfront wages to pay for immediate expenses like their rent/mortgage, utilities, and so on -- it's investment income that offers consumers their greatest chance at building wealth over their lifetime. The stock market has historically returned 8% per year; at this pace, investors could double their money every nine years. In reality, consumers should want to pay as low a tax rate as possible on their investments in order to preserve as much of their retirement savings as possible.

Two key takeaways
I took two key lessons away from this survey.

First, I don't think it would be possible to streamline our tax code to the point where we'd get a consensus opinion on many tax questions. Because the U.S. tax code is so fragmented and complex, we'll continue to see public opinion range all over the place when it comes to tax fairness.

Further, the responses suggest that Americans are somewhat shortsighted. Most responses suggest bringing more fairness to the tax system -- i.e., having corporations and upper-income individuals pay more in taxes -- but they also suggest that consumers aren't thinking about what will happen many, many years from now. The investment income response is one clue that most consumers aren't thinking about the potential long-term implications on their taxes.I'd suggest that if this same survey were conducted with the same 1,086 people in 10 years, we'd get markedly different results.

The article 3 Startling Findings on the "Fairness" of Taxes originally appeared on Fool.com.

Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool owns shares of, and recommends Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.