Whether tax time brings winces and groans as you write a check to the IRS or relief and a smile as you receive a refund, we don’t often stop to think about what our tax system represents. With a beleaguered IRS and recent tax reforms that disproportionately benefited wealthier people, the tax system can seem like it isn’t playing fair. Taxes aren’t just something you can’t avoid (along with death, as the saying goes). And they’re not something the government does to us. Our tax system is a statement of our collective values.
When we pay our taxes, we are saying to each other, “I’m putting in my contribution to what we all share — roads, schools, libraries, clean drinking water and parks.” While our income tax rates may vary, we also contribute by paying payroll and sales taxes. So if someone uses “clever accounting” to avoid paying taxes, they’re not just getting away with something individually, they’re failing to contribute to the public goods we all share.
Public goods are things we all need but usually can’t afford to buy as individuals. They allow all of us to drive on roads that aren’t riddled with potholes and that are sanded on icy days. But most of us can’t independently pave or sand the roads we use. Likewise, an elderly or childless person might not have any kids at the local high school, but they benefit from living in a community in which children are cared for and educated, and then they can grow up to contribute to society.
Our tax laws also make statements about what is important to us as a society. For example, the federal and state Earned Income Tax Credits (available to workers earning under about $57,000) shows that we value and support the efforts of workers in middle- to low-wage jobs while raising kids. The existence of the Child Tax Credit is a declaration that raising the next generation benefits our society as a whole, so it is an effort in which we want to invest.
When families have more money in their pockets, our research shows that parents often invest in children and pay for household essentials. A shopping list of diapers, a child’s winter jacket, the electric bill, a tank of gas or some read-aloud books might not sound exciting, but it’s the stuff of family life. Those dollars also flow out into local businesses, building economic activity, with spillover advantages for the broader community.
By the same token, when we tax capital gains at a lower rate than income, we’re saying that making investments and playing the stock market is more important than working a regular job. There are arguments to be made for doing so, but it is essential to remember this is not just an economic decision, it is also a values decision.
The wealthiest among us have been getting proportionally wealthier over time, and it’s not just because they work harder or smarter than the rest of us. The gap between the wealthy and everyone else has been growing since the 1950s, both in Wisconsin and across the nation. We have set up a tax system that makes it easier for them to gain wealth than it is for the rest of us.
Moving forward, implementing our values through our tax system can mean changing tax rates, but there are also relatively straightforward steps that would make the existing tax system fairer and more efficient. The IRS is unpopular, and so it has seen years of budget cuts. That has left taxpayers facing longer wait times to get questions answered and refunds processed. It has also meant that the wealthy are far less likely to face audits than their lower-income counterparts, given the resource demands of scrutinizing their complex refunds and paying their lawyers (neither of which lower-income tax filers typically have). Further, a better-funded IRS can work to close the $1 trillion annual “tax gap” — the difference between what is owed and what is paid.
As we discuss questions of tax burden in Wisconsin, the Biden administration’s so-called billionaire income tax plan, or IRS reforms and funding levels, we need to view our tax system as a statement of our community’s values.