Home | Business News | Browse by Publication | S | South Dakota Business Review

Behavioral implications of U.S. tax policy: does tax law influence individual taxpayer behavior?

Article Excerpt
Abstract

The authors of this paper undertook a study that sought to determine whether certain tax provisions applicable to individual taxpayers impacted their behavior in such a way that might further those objectives not tied to revenue generation. In particular, the objective of the study was to assess whether tax laws that are perhaps more justified by economic, social and political motivation are indeed accomplishing their likely intended purposes. In addition, information was sought from taxpayers as to what policy factors should be allowed to legitimately influence tax law, as well as information on how the tax law impacted their own spending, investment, and savings behavior. Students enrolled in selected advanced accounting classes (senior level tax course and junior level intermediate accounting) and introductory finance classes in a mid-sized Midwestern university were given the opportunity to participate in the research study by administering surveys to taxpayers during the spring 2007 semester for extra credit. In total, over 500 usable responses to the survey were received.

INTRODUCTION

Most Americans recognize that the federal government provides a number of valuable programs for its citizenry, and understand that these services require funding from a variety of sources, including an income tax or equivalent levy. According to the U.S. Department of the Treasury's Fact Sheet, federal receipts are spent on many programs, including: Social Security and Medicare, national defense, income security programs (e.g., unemployment compensation), health care, education, transportation--and the list goes on (U.S. Dept. of Treasury, n.d.) As stated by the U.S. Government Accountability Office, "the individual income tax has long been the largest source of federal revenue--amounting to $927 billion (7.5% of Gross Domestic Product GDP) in 2005" (U.S. GAO, 2006).

The need for revenue to pay for these services should not, by itself, cause the level of complexity that presently exists in the current federal tax system. It is widely recognized that complexity has a number of associated costs that negatively impact society. Chris Edwards, Director of Tax Policy Studies at the Cato Institute, believes complexity imposes at least four types of costs on society: annual compliance costs (estimated to be $265 billion in 2005); inefficient economic decision-making; invasion of privacy by the government; and noncompliance with the law (Edwards, 2006). With respect to the latter point, the nation's gross tax gap--the difference between what taxpayers should pay and what they actually pay on a timely basis--was $290 billion in 2001 according to the IRS, after considering government enforcement activities and other late payments. David Walker, U.S. Comptroller General, in his 2006 testimony before the U.S. Senate Committee on Finance, further elaborated on the evils of complexity: "(1) significant compliance costs, frustration and anxiety for taxpayers; (2) decreased voluntary compliance; (3) increased difficulties for the Internal Revenue Service (IRS) in administering the tax laws; and (4) reduced confidence in the fairness of the tax" (Walker, 2006).

Several reasons have been advanced as to why the tax law has taken on such an onerous character. William Gale of the Brookings Institute identified four factors that contribute to the overall burden: a conflict among the consensus goals of tax policy; the political process itself; the need to deter tax avoidance; and the fiscal needs of the government (Gale, 2001). While there is general agreement that the tax system should be simple, there is also considerable support for the position that the law should be equitable, economy-friendly, and enforceable. Thus, some believe that a certain level of complexity is necessary to achieve these other goals. Incentives also exist for politicians and lobbyists to favor specific subsidies that reduce taxes for certain constituents or activities. However, these subsidies create distinctions among taxpayers as well as between income sources and uses. These distinctions tend to add complexity and thus increase the tax burden. Furthermore, many detailed rules are frequently needed to tighten or close loopholes that taxpayers might use to their unfair advantage. The intricate structure and accompanying magnitude of rules and regulations have also arisen from the government's need, especially in periods...

View this article FREE - Now for a Limited Time, try Goliath Business News
Free for 3 Days!