90% of Taxpayers Say Investment Income Should Be Taxed Like Wages

With virtually no chance of tax reform this year, WalletHub gauges taxpayers’ mood on current tax code

"Investment income is very difficult to tax," tax law professor Mark Gergen said. "Investment income is very difficult to tax," tax law professor Mark Gergen said.

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As political strategists and lawmakers on Capitol Hill put the chance of tax reform this year at zero, taxpayers are weighing in with their own opinions on how the nation’s current tax code stacks up, and where they’d like to see changes.

In a just-released survey of 1,086 Americans of various backgrounds, WalletHub’s 2014 Tax Fairness Survey found that while 80% of respondents rate the current tax cost as either “complex” or “extremely complex,” 90% of respondents believe income from investments should be taxed at least as much as wages.

Indeed, the survey noted that more than half (58%) say wages and investment income should be taxed “equally,” while 33% say investment income should be taxed more than wages.

WalletHub asked a panel of experts to weigh in on the survey’s findings. As to whether investment income should be taxed like wages, Mark Gergen, the Robert and Joann Burch D.P. professor of tax law and policy at UC Berkeley School of Law, agrees that “In principle, perhaps yes.” However, he said that “as a practical matter, investment income is very difficult to tax. My own preference is a wage or consumption tax and a wealth tax with a very low rate, such as .5%.”

Alexis Anagnostopoulos, assistant professor of economics at Stony Brook University, opined that “the problem” with taxing investment income “is that capital tends to be much more mobile than labor,” which means “that high taxes on investment returns could lead to reductions in investment, which is not good for anyone.”

Anagnostopoulos argued that “how responsive investment is to tax changes is a subject of controversy, but I think it is fair to say that it is more responsive than labor supply.”

While “it does sound like a fair thing to do to tax capital and labor income equally … one has to be careful to tax capital income in ways that do not directly affect the returns to investment.”

As to the tax code’s complexity, the survey found that 44% of respondents believe the fairest possible tax code would have fewer deductions than today.

Gergen, the law professor, added that the solution to remedy the tax code’s complexity is to “eliminate the income tax, including the corporate income tax, and substitute a wage tax or consumption tax, a carbon tax, and a wealth tax.”

Benjamin Russo of the University of North Carolina Charlotte agreed wholeheartedly with the survey respondents on the complexity of the tax code, suggesting to make the tax code simpler, “eliminate tax expenditures, such as: special tax treatment of favored industries and groups, the mortgage interest deduction, charitable contributions, moving and medical expenses, child tax credits, Social Security income, etc.”

The survey also found that while less than one-quarter (24%) of respondents support a flat income tax, more than three-quarters preferred one of the more progressive options.

The survey noted that men are more likely than women to prefer a flat tax (29% versus 20%), with the difference between men and women 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).

Other highlights of the survey findings were:

  • Almost two-thirds of respondents (65%) believe corporations should face higher tax rates than consumers.
  • Americans view taxes on wages and gasoline as least fair and taxes on alcohol and tobacco as fairest.
  • Americans view tax fairness (61%) and tax equality (21%) as more important than whatever is best for the economy (18%).

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