Survey Says Tax Confusion

All Americans are affected by the tax code—but do they understand the tax code? To find out, the Tax Foundation’s educational program, TaxEDU, and Center for Federal Tax Policy conducted a poll with Public Policy Polling. The poll surveyed more than 2,700 U.S. taxpayers over 18 years old—spanning the political spectrum and income distribution—to gauge Americans’ knowledge of basic tax concepts and opinions of the current tax code. 

The results: most Americans are confused by and dissatisfied with the federal tax code.
 
 Links:
 
https://taxfoundation.org/blog/national-tax-literacy-poll-education/ 

Transcript

Kyle Hulehan: 0:00

All Americans are affected by the tax code. But do they understand the tax code? To find out the tax foundations educational program tax EDU, and the center for federal tax policy conducted a poll with public policy polling. The poll surveyed more than 2,700 us taxpayers over 18 years old, spanning the political spectrum and income distribution to gauge American's knowledge of basic tax concepts and opinions of the current tax codes. The results. Most Americans are confused and dissatisfied with the federal tax code Hello, and welcome to the Deduction, a Tax Foundation podcast. I am your host, Kyle Hulehan, and today we are joined by Zoe Calloway, Director of Education here at TF. Zoe, how are you doing today?

Zoe Callaway: 0:44

I'm doing great, Kyle. How are you doing today?

Kyle Hulehan: 0:47

I'm good. I can't help but notice, I mean, this isn't a shock to me, but our listeners who heard you in, October, they might not catch on to this, but you have a new title, Director of Education. First off, that's very impressive. Congratulations. I just want to know as a lowly, senior marketing associate, should I be talking about full expensing more? Is that what put it over the top? Do I need to talk about bonus depreciation and Slack messages more? Is that, does that put it up with top?

Zoe Callaway: 1:12

That is exactly what got me to where I'm at.

Kyle Hulehan: 1:15

Yeah, it's absolutely not true. You worked very hard and you're very talented, but I thought maybe if I talked about full expensing just a little bit more, that would help a little bit. So we just announced this exciting new polling project. Could you tell us more about it?

Zoe Callaway: 1:28

Happy to Kyle. So this is actually the first poll that Tax Foundation has done in 15 years. So it was about time for us to conduct another one, TFS Educational Program TaxEDU, and our Center for Federal Tax Policy surveyed tax literacy and attitudes amongst US taxpayers over 18 across the political spectrum and from all income levels in a poll that we conducted with public policy polling. The rationale behind conducting this poll was to prove a hypothesis. Obviously we're an educational organization. My role as director of education is based in educating about taxes, but is it necessary? And we found in these results that yes, it is necessary. Not only do taxes impact most Americans in one way or another, and the taxpaying public is a sizable portion of our population, But the results showed people really don't understand how taxes work or the basics of taxation when it comes to things like the income tax. So it's good data for us to have.

Kyle Hulehan: 2:29

I think this is pretty good data for us to have. So let's Dive into these results. I want to know what taxpayers think. very excited internally at TF to hear about this and learn more about this project. So could you start off real quick and just give us a broad overview of why tax literacy is crucial for the average American?

Zoe Callaway: 2:48

Absolutely. So like I just said, taxes impact Most of us, to be honest, on our day to day and our personal finances, but I will frame this in that April is financial literacy month, which is very important. We definitely need more financial education in school. And part of that is tax literacy. Most of our personal financial decisions are impacted by taxes in one way or another. So think about your own personal finances, Kyle. When you got that salary number from Tax Foundation, you probably just thought about that number. But then when you have to budget, you need to understand the difference between your gross pay and your after tax pay. And that's where taxes come into play and not just that it's in our spending and our investments and our savings, it's pretty much in any financial aspect that we could think about when we're making a plan. And so understanding not just how these taxes work, but when we might face them can really be a game changer when it comes to having strong financial literacy for ourselves.

Kyle Hulehan: 3:46

And I think, something that people don't always understand. I'll use a personal example here to explain how important they are is I was doing my taxes myself for, my job here at the tax foundation. And I actually realized that I had money that available that I could put into an HSA, and that's a write off. That's something I can deduct from, how much money I made this year. And I put 2, 000 in there. And then I went from having No tax return to a tax return. So I got some money back from the government. And I think it's something like that, that people, if you are educated and you can understand where you can deduct things, how it actually works is it can benefit you quite a bit if you have, that education,

Zoe Callaway: 4:24

Absolutely. I mean, education in any arena is the first step in really being successful in what you do.

Kyle Hulehan: 4:30

Absolutely. So this, the survey highlighted a significant gap in understanding, of basic tax concepts. What do you think many people find so complicated about taxes?

Zoe Callaway: 4:42

Not to put it so simply, Kyle, but I'd say it's because taxes are complicated, and one of our four principles here at TF is that taxes should not be complicated, they should be simple, but unfortunately, that's not our current reality. So, couple a complex tax code with a general lack of education and schooling. I know you and I, Joke about this that in school, the joke on the internet right now is, I learned that the mitochondria is the powerhouse of the cell, but no one ever taught me how to do my taxes. And so I think it's a common sentiment that even though we face taxes in so many aspects of our life, no one bothered to teach us anything about them. And not many of us are interested in seeking out that information either until something comes up. And then you have this complex tax code you're met with that you have to tackle head on with no background.

Kyle Hulehan: 5:34

I think a really big part of it is that it's not something that we know about there, unfortunately have not been enough classes and enough learning and education on this. and I found it interesting that many people don't understand the difference between a tax credit and a tax deduction. Could you clarify this for our listeners? And maybe like put it in simple terms for someone like me to understand.

Zoe Callaway: 5:57

So both credits and deductions save you money and that could be a point of confusion when you think well I'm going to save money either way. What does it matter what I take? But it does matter what you take because Actually, you can keep more of your money with one over the other. So, tax deductions reduce how much of your income is taxed, which indirectly reduces the amount you owe. On the other hand, a credit, like the child tax credit, reduces your tax liability by the amount of the credit output. right? While each policy benefits different groups of taxpayers at the end of the day, most people are going to benefit more from a tax credit because of that structure, than from a tax deduction. So say if you had a 2, 000 tax credit, you actually save 2, 000, whereas a 2, 000 tax deduction could only save you 400.

Kyle Hulehan: 6:44

And to highlight something else, that maybe is like a little bit, interesting in this is that in the poll, most people in the poll said that they wanted lower taxes. There's also the call for high earners to pay more. How do you think we can reconcile these seemingly contradictory views?

Zoe Callaway: 7:04

Exactly. So what we got from our results, Kyle, is that 71 percent of our respondents supported lowering the top income tax rate, not just their own tax rate, but Of those respondents, 54 percent also wanted high earners to pay more. And this is just absolutely a contradictory opinion. And what's interesting here is that when you see contradictions like this, it's a clear highlight of a lack of understanding of what's going on in the tax system and maybe falling susceptible to things that they might be hearing in the media instead of genuinely understanding our tax code. So while it might be easy to say, yeah, let's lower tax rates because that might benefit me. Well, that really only benefits the top tax bracket earners, but you can't tax them higher at the same time. And I think that's where we hear media talking points coming in and influencing opinions instead of, witnessing this like strong base of tax knowledge and education that people could have in order to not fall susceptible to these narratives that we hear.

Kyle Hulehan: 8:06

It's not surprising to me that this happens. So tax reform seems to be a popular topic. And I think, we're seeing these contradictory reviews and all these kinds of different things, but what. What kind of changes do people want to see based on your findings?

Zoe Callaway: 8:23

So about two thirds of our respondents in this survey indicated that the tax code is unfair, and about the same number say that it's overly complex, like we just mentioned. That's why it's difficult to understand. And when it comes to how we could reform the system, and if we should reform the system the distribution of the tax burden, was the top aspect most in need of reform, according to our respondents. And most suggested that The reform specific to distribution, being that as we just talked about before having high earners pay more. And again, this is a common talking point. We hear it from Biden. We hear it from Congress members. Like we just said, even though they want to lower the top income tax rate, Most of our respondents did support actually increasing that tax rate to be the reform. And I think part of this too, is when we look at the responses, most people also express a sentiment that they don't think that the government services that they're receiving are equal to what they're paying in their taxes. They think that their taxes are too high for the value that they're getting back from these government services.

Kyle Hulehan: 9:25

So we're saying that, many, tax respondents, that they feel like they don't get good value for their tax dollars. How does this, perception affect their views of taxation and government spending?

Zoe Callaway: 9:36

I think it's easy when, us as taxpayers can look at it and see how we feel as well. If you can feel the burden of what you're paying, and you see the burden, in your paycheck, in your finances as you're working through it, and you think, I'm paying so much in taxes, I'm, I'm paying it on my income, I'm paying it at the counter, I'm paying it on this, that, and the other. You expect to see a return on that investment. And so you can become really dissatisfied with the tax code when you don't feel that the services you're getting in return meet or match what you've been paying into it and so we see that in the responses. They really don't feel that they're getting that good value for their money but if you're feeling dissatisfied with something it can really give more of a negative view on other aspects of the tax code and really have you support more reform, more change, shifting burdens. And we saw that across our answers in this poll.

Kyle Hulehan: 10:30

I do wonder if a part of this is also maybe some, I know this isn't a part of the poll, but I do wonder if some people don't understand, what they're getting from their taxes as well. And, and that can be a literacy issue where, you don't understand property taxes are going to your schools and things like that. And you don't understand, which taxes are going to roads and what's funding, things that you're using in your everyday life. And I feel like that maybe plays into this is that people don't even know that they're getting value from the tax dollars.

Zoe Callaway: 10:54

Absolutely. I just actually did a webinar for personal finance educators in New York City, and one of the most popular questions that we got during the webinar was, where do our tax dollars even go? And do we have a say in that? Why don't we have a say in that? And so, taking the time to talk about how again, with many things with taxes, it is complicated. It's not a simple answer. where your tax dollars go is often based on the tax type and who's levying the tax on you, whether that be a local government, your state government, the federal government. And if it's an excise tax, then that revenue might go towards offsetting societal externalities that might come from, say, smoking cigarettes, which the excise tax is placed on the purchase of. But then there's other taxes that go into more of a general bucket where our elected officials can decide, what priorities they choose to fund. And I think it's that side of taxation where it might be harder to understand, the value that's coming from what you're paying into, is when it goes into that general bucket, and other people are making this decision for us, it's harder to track, it's hard to find, the budget can be complicated to comb through, Even if you are an expert in it sometimes and for the average taxpayer, you can just feel kind of in an abyss when it comes to, taxes and spending of the government.

Kyle Hulehan: 12:20

This rolls in so nicely here to this last question, you know for the listeners who might be feeling overwhelmed by this abyss of taxes and all the inundation and information that you can get into but then you get into the weeds and it's confusing And you don't understand it. What are some of the steps that they can take to become more tax literate?

Zoe Callaway: 12:37

Think the first step is to identify where you easily recognize taxes in your own life. If you're in a state with a sales tax and that's the most recognizable thing for you is that when you go to the store you see that extra line item on your receipt and you have questions about that, start there. It's easier to learn Anything. If you have the building blocks in your mind to start with. So start with something that you can relate to, that you have some understanding with and just dive deeper into it. See, are there nuances to it that you could learn more about? And I'll highlight, tax day is coming up. Tax filing deadline on April 15th Part of that is tax brackets and we see that a lot of people we interact with just simply don't understand how tax brackets work But it's something that they have to deal with every single year for their federal income tax and for many people their state income taxes as well, so We do have that building block there. That's something that we can start and tackle with and once we dive into it You can be surprised by how much we're able to learn about things like a graduated rate structure. And then that can take you even further into understanding, taxable income versus gross income and how you get there. And then you can just weave your way through. It's a pathway, but just finding that starting point can be the easiest way to really boost your knowledge.

Kyle Hulehan: 13:52

So zoe it is Financial Literacy Month. Is there anything else that you want to plug that's, TaxEDU based or anything else about this polling project that our listeners should know?

Zoe Callaway: 14:03

Of course. So for anyone looking to learn more about taxes, and I would highly recommend that most of you should explore that because we could all stand to learn more. you can check out TaxEDU free resources on the Tax Foundation website under education. We have videos, lesson plans, this great podcast that you're listening to, and more that you can check out. And if you're looking for more, maybe fun items, you could check us out on Twitter as well. Taxedu underscore where we share some quirky little tax facts that might be interesting to check out as well in addition to announcing new resources that are available. And I want to be clear that these are not just for educators. These are for you, the average taxpayer as well. Even CPAs who have tax knowledge and work with taxes use our materials quite frequently. So, Taxedu is for everyone. And Kyle, when it comes to the poll, there's a lot coming out. So I want everyone to keep their eyes peeled. this initial blog post that we released is not all that is to come. There will be a trickle of posts coming out through the summer as we really dive into this data and work on the cross tabs and figure out what we have at our fingertips here. And I would say by the end of the summer, you can expect to see our full analysis and report of this data released. But if anyone's looking to check out the data, if that's really what you're into and you want to dive into the numbers, feel free to, reach out to us and that data will also become publicly available on our website later this summer.

Kyle Hulehan: 15:28

I'm very excited to see the rest of this polling project. Zoe, for joining the show today.

Zoe Callaway: 15:33

Awesome. Thanks, Kyle.

Kyle Hulehan: 15:35

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