Factors That Shape American A itudes Toward Taxation

Policy Note: Elizabeth Pearson, July 1, 2013

The notion that resistance to taxation is a core component of American national identity has been challenged in recent years by the hard realities of scal crisis, which have led to tax increases both nationally and at the state level. California voters 2012 approval of temporary increases in the sales tax and income taxes on upper-income households has received the most a ention, in large part because it seemed to represent a new scal bargain with the very voters who had ushered in the tax revolt of the late 1970s by adopting Proposition 13. By adopting these new revenue measures, California actually joined a majority of states that raised taxes or fees during the recession to balance their budgets.1 Despite the frequency with which Americans have supported higher taxes to resolve budget shortfalls, contemporary rhetoric continues to emphasize popular resistance to taxation. In this policy note, I step back from the recession-induced tax increases of the past few years and draw together the insights of recent work by historians, political scientists, and sociologists to explain what social science research tells us about the factors shaping Americans views toward taxes and conditions under which Americans will support higher taxes. Many scholars now suggest that a key cause of contestation over taxation in the United States is our heavier reliance on the progressive income tax. The link between progressive taxation, political backlash, and lower support for public spending has led to policy recommendations for less-visible taxes that Americans are more likely to support. In this policy note, however, I argue that support for taxation is dependent on a wider range of political conditions ! like the role of political elites, the information citizens have about a tax policy, and the sequencing of tax policymaking ! and policymakers should not assume that some types of taxes automatically command more support than others. The Exceptional American Tax System Much comparative research on taxation has developed out of the puzzle of why the United States spends less on social policies than other wealthy nations and has had less success in reducing poverty and inequality.2 This research shows that, compared to other nations, the American tax code is exceptional in several ways: America taxes less than other nations, has a more progressive tax structure, and is more prone to using provisions in the labyrinth of federal tax rules (like deductions and credits) as vehicles for delivering social policy benets.3 Indeed, these features of American taxation seem to be linked: the progressivity of the tax code generates political resistance to taxation, which translates to lower support for public spending and a greater embrace of tax expenditures or tax preferences,4 and ultimately undermines our ability to combat poverty and inequality. At rst glance, this claim seems puzzling: why would progressive taxes, which seem redistributive by design, end up producing lessgenerous welfare states that are relatively ineective at reducing market-generated inequality? Visible Taxes First, some scholars suggest that progressive taxes on income and property are more visible than regressive Elizabeth Pearson is a Roosevelt Institute | Pipeline Fellow and a Ph.D. candidate at the University of California-Berkeley. Her research analyzes the politics of tax reform in the post-war United States, with a particular focus on the overlooked histories of statelevel scal policy. Her broader research interests include political and economic sociology, federalism, and social policy. Prior to her current graduate work, Elizabeth received her B.A. in political philosophy at Whitman College and an M.Phil. in Development Studies at the University of Oxford, where she studied as a Rhodes Scholar. From 2007 to 2009, she also worked on state scal policy as a research associate at the nonpartisan Iowa Policy Project. To contact the author, call Tim Price at 212.444.9130 ext. 219 or e-mail tprice@rooseveltinstitute.org. The Roosevelt Institute is located at 570 Lexington Avenue, 5th Floor, New York, NY, 10022. The views and opinions expressed in this paper are those of the author and do not necessarily represent the views of the Roosevelt Institute, its ocers, or its directors. 1

Are Less-Visible Taxes Really the Answer?

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taxes on consumption, and that this visibility generates political backlash against taxation. According to political scientist Harold Wilensky, visible taxes on income and property are paid once or twice a year with full awareness of the amount and ambiguity about which services they buy. Countries foolish enough to rely too much on painfully visible taxes can expect to experience more tax resistance when economic conditions squeeze the middle class.5 In contrast, Americans have consistently expressed support for the regressive payroll taxes that fund Social Security and Medicare, which are paid automatically in small amounts throughout the year and linked to a specic, universal benet.6 More than the overall level of taxation, these arguments suggest it is the visibility of taxation that shapes political a itudes toward revenue generation. Tax Preferences Second, reliance on progressive taxes may be one factor encouraging the proliferation of tax preferences. And because these provisions tend to funnel benets toward middle- and upper-income households they make the tax code less eective at reducing poverty than would otherwise be the case. While the United States is less generous than other rich nations in terms of direct social expenditures, it has a costly hidden welfare state in the form of social spending through the tax code. Lawmakers on both sides of the aisle in the United States have o en turned to tax expenditures as a way to accomplish their policy goals. One reason for the popularity of this strategy may be the visibility of the progressive income tax, which makes Americans more sensitive to the taxes they pay, and in turn makes calling for tax cuts and targeted tax preferences a protable political approach.7 While some of these tax provisions, such as the Earned Income Tax Credit (EITC), target the working poor to great eect, the majority of tax expenditures end up beneting the auent through provisions like preferential tax rates on capital gains and dividend income or tax deductions for mortgage interest.8 Tax expenditures o en become permanent parts of the tax code and are usually not subject to the same scrutiny as appropriations, meaning that they can grow exponentially in cost with li le warning, generating structural strains on the budget. Should Progressives Embrace Dierent Kinds of Taxes? The end result of relying on progressive taxes to fund government therefore seems to be a visible, politicallycontested tax system that leaks revenue through the heavy use of tax preferences.9 One of the major recommendations that has emerged from this scholarship emphasizes the advantages of generating new revenue from less-visible taxes that are clearly linked to specic benets. For instance, political scientist Andrea Louise Campbell urges progressives to rethink their opposition to a value-added tax (VAT),

citing the fact that it is paid in small increments with each purchase without an annual tallying up as a key asset. Earmarking VAT revenue to fund a package of social investments, or dedicating a portion of it for federal aid to states, would also increase its a ractiveness by creating a clear link between taxes paid and benets received, in the manner of Social Security.10 According to this argument, relying so heavily on visible progressive taxes has produced a toxic tax politics. In order for progressives to cultivate more sustainable public support for taxation, we must embrace di erent types of taxes, including a consumption tax. Creating Tax Politics The political consequences of progressive taxation are real, and should not be ignored by progressive policymakers. In fact, a well-designed national consumption tax should certainly be one of the proposals under consideration in discussions concerning structural budget reform. But a central temptation following from arguments about the relationship between tax visibility and popular support is to conclude that the form of taxation is the most important factor determining public a itudes toward taxation. This would be a mistake. Policies may create contexts that make certain political outcomes more or less feasible, but they do not on their own produce automatic political responses. Indeed, a host of additional research demonstrates that Americans feelings toward taxation and their willingness to support tax increasesare shaped by the interaction of policy design and a broader set of institutional and political conditions. Political Elites Shape A itudes First, politicians and political parties play an important role in shaping how voters and the public interpret taxes. Arguing against a mechanical view of the relationship between tax policies and political a itudes, political scientist Kimberly Morgan writes that there is no inevitable feedback eect of tax systems on social policy outcomes: instead, this relationship is mediated by the behavior of political elites, who choose whether or not to use taxes and other public policies as a resource in their political ghts.11 The role of political elites in shaping tax sentiment is particularly clear in the historical timing of political resistance to taxation. Throughout much of the twentieth century, Americans expressed widespread support for taxation, even as tax burdens rose and the federal income tax was expanded dramatically in the 1940s to include most Americans for the rst time.12 Public opinion research, again by Andrea Louise Campbell, shows that Americans views of taxation are generally based in self-interest: the higher their taxes, the more likely they are to feel negatively about 2

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taxation. But, Campbell demonstrates, Americans have actually become more sensitive to changes in taxation in recent decades, with the t between tax a itudes and the cost of taxesor the responsiveness of Americans to the level of taxesgrowing much tighter since the 1970s.13 Campbell a ributes this change in public responsiveness to the increased politicization of taxes a er the 1970s. She tracks the mention of taxes in presidential nomination acceptance speeches, general election speeches and TV ads, and party platforms and nds that as politicians talked about taxes more, Americans became more conscious of the taxes they pay. How did taxes come to occupy such a central place in American political discourse, and particularly in the identity of the modern conservative political movement? Contemporary anti-tax politics are o en traced to the tax revolts of the late 1970s that began at the state level and resulted in the adoption of propertytax limitations across the country.14 But the continuing resonance of anti-tax politics owes much to the political possibilities that the Republican Party saw in tax issues, beginning in the late 1970s. Throughout the 1950s and the 1960s, Republicans opposed decit spending and o en endorsed tax increases to balance the budget. Few conservatives in the late 1970s and 1980s saw tax cuts as an ideological commitment. Sociologist Monica Prasad argues that Republicans came to embrace tax cuts during this period as they recognized their political appeal as a positive and constructive solution to ongoing economic troubles, which combined high ination with sluggish economic growth. In Prasads view, the true story of the tax cuts at the center of Reagans neoliberal agenda shows a groping a empt by Republicans to respond to public opinion during a time of economic crisis.15 In other words, political backlash against taxes is a process deeply shaped by the political goals of politicians and other elites who, in advocating tax cuts as a solution to the economic problems of the day, ended up amplifying Americans sensitivity toward the taxes they pay. In more recent tax policy debates, when ideological commitments play a stronger role than in the 1980s, political elites have at times gone much further to shape popular opinion around taxes. In their analysis of public support for the highly-regressive Bush tax cuts of 2001 and 2003, Jacob Hacker and Paul Pierson conclude that political elites deliberately concealed the scal tradeos of the massive tax cuts and misled voters on the distributional eects of the policy to build mass support for tax cuts that would disproportionately benet wealthy Americans. Republicans also used policy design elements like phase-ins and sunsets of various tax

provisions to hide the cost of the tax cuts and build incentives among auent taxpayers to apply political pressure in favor of maintaining the policy.16 Yet a itudes can shi depending on what Americans know about a policy; in a revealing experiment, Suzanne Me ler and Ma Guardino show that participants who receive information about the distributional impacts of tax policies (in this case, three common tax expenditure programs), were more likely to express opinions about these policies. Most strikingly, low- and middle-income participants expressed signicantly more opposition to tax expenditures that disproportionately benet the auent once they had been exposed to information about the policys distributional impacts. 17 The implication of such research is that Americans are susceptible to the ways taxes are designedbut most of all to how they are talked about and represented by politicians. Americans Do Vote for Higher Taxes The institutional environment of policymaking, including political and constitutional factors that structure the sequencing of tax policymaking and determine whether or not voters have the right to the initiative and referendum, also shapes how Americans perceive taxes and their willingness to support higher taxes. During the decades following WWII, state governments sought new revenue to meet rising demands for public services, including education, and aid to local governments. In states that allowed the initiative and referendum, new income and sales taxes were o en placed on the ballot for voter consideration.18 Regardless of the type of tax proposed, when lawmakers were able to implement new taxes before they were subject to a voteo en through the use of legislative techniques that designated the new tax as an emergency law that needed to take eect immediately, even pending a repeal eortvoters consistently endorsed the retention of these taxes. In this context, pro-tax coalitions could emphasize the benets already secured by the new tax (and which would be lost upon repeal), anti-tax coalitions struggled to a ract support and funding, and voters had direct experience with the tax by the time they headed to the polls. Yet in states where voter approval was a prerequisite to the implementation of a tax, these dynamics were reversed. Anti-tax groups were mobilized by the threat of a new tax, voters had to rely on confusing and o en-misleading information about the potential impacts of the proposed tax, and pro-tax groups became preoccupied with voter education rather than mobilization. No major new taxes were adopted during this period in the four states where voter approval was a prerequisite for tax collection.19 During these episodes of tax reform, Americans a itudes towards new taxes and their willingness to 3

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support increased taxation depended on the mobilization of pro- and anti-tax coalitions and the tenor of political debate around these issues, which in turn depended more on the sequence of policymaking than on the specic details of the tax under consideration. Advancing a Progressive Tax Agenda Ultimately, the broader body of social science scholarship on the politics of taxation suggests that a progressive tax agenda must go beyond clever designs for new tax policies that generate revenue in unobtrusive, politically-palatable ways. Policy design alone cannot generate pro-tax politics. Even if new forms of taxes are pursued, additional work must be done to alter our tax politics. At dierent points in history, and at both the state and national level, Americans have proven willing to support higher taxes of various kinds. However, social science research suggests that cultivating this support in the current political environment will require eorts on several fronts: Political elites must work to develop a new vocabulary for talking about taxes that, for example, links revenue and investment. Tax revenue funds critical public services and infrastructure, from public schools and re departments to sanitation systems and interstate highways. Too o en, raising taxes and tax cuts alike

are discussed in isolation from the rest of the budget. Making scal tradeos explicit will highlight the concrete benets of generating adequate revenue and the common costs of tax breaks. Politicians and activists should also focus on providing Americans with be er information about tax policies under debate. Although some of these eorts will be short-term and related to specic policy proposals, others need to be long-term projects aimed at increasing Americans tax literacy, or understanding of how the tax code works and how its benets are distributed. Americans may become more supportive of taxes once they have already experienced the benets taxes help secure and have a clear, accurate sense of their costs. Temporary, renewable taxes can be one way to build a constituency around new revenues (and prevent cuts to public services during an economic downturn), but such measures are not a substitute for structural reforms. At the federal level, such reforms would include reining in inecient and regressive tax expenditures and closing corporate income tax loopholes. In the states, needed reforms include covering digital goods and services in state sales taxes, building robust reserve funds, and implementing corporate income tax provisions that limit tax avoidance by multi-state corporations.

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Endnotes
1. Elizabeth McNichol. 2012. Out of Balance: Cuts in Services Have Been States Primary Response to Budget Gaps, Harming the National Economy. Center on Budget and Policy Priorities. April 18. Available from: h p://www.cbpp.org/cms/? fa=view&id=3747. As the Center notes, while most states raised taxes and fees to cope with budget gaps, they were more likely to do so in 2008 and 2009 than in other years and, overall, have relied primarily on spending cuts to balance their books. Tax increases in most states were imposed by the legislature, but California was not the only state where voters approved new taxes. Notably, in 2010, Oregon voters approved two measures to raise income taxes on corporations and upper-income households. Chuck Marr and Mike Leachman. 2010. Oregon Voters Approval of Tax Increase Noteworthy as Federal Debate Opens. Center on Budget and Policy Priorities. February 16. Available from: h p://www.cbpp.org/cms/? fa=view&id=3083. 2. Monica Prasad (2012) analyzes and greatly expands this research in her recent book, The Land of Too Much: American Abundance and the Paradox of Poverty (Cambridge, MA: Harvard University Press). She argues that agrarian resistance to regressive taxation explains the lack of a national sales tax in the United States and high American reliance on the progressive income tax, but that this reliance has helped undermine the public welfare state. 3. Andrea Louise Campbell. 2012. America the Undertaxed: U.S. Fiscal Policy in Perspective. Foreign Aairs September/ October. In addition to these features, Campbell discusses the complexity of the American tax code as a key component of its exceptionalism. For another account of Americas exceptional tax structure and how it has contributed to increasing inequality, see the discussion by Colin Gordon in Growing Apart: A Political History of American Inequality, available from Inequality.org: h p://scalar.usc.edu/works/growing-apart-a-political-history-of-american-inequality/index. 4. A wide range of provisions in the federal tax code, including exclusions, deduction, preferential rates, and credits, lower the amount of revenue that would otherwise be collected under a given set of tax rates. Calling these provisions tax expenditures reects the fact that they have the same eect on the federal budget as direct spending. Because these provisions target tax breaks at specic groups of taxpayerswho may range from homeowners and parents to solar energy producers or oil companiesthey are also o en referred to as tax preferences. The Congressional Budget Oce has a recent, helpful analysis of the ten largest tax expenditures in the federal tax code and how their benets are distributed by household income. Available from: h p://www.cbo.gov/publication/43768. 5. Harold L. Wilensky. 2002. Rich Democracies: Political Economy, Public Policy, and Performance. Berkeley: University of California Press, p. 380. As noted above, Monica Prasad also makes this point, both in her 2012 book The Land of Too Much and her 2006 work The Politics of Free Markets: The Rise of Neoliberal Economic Policies in Britain, France, Germany, and the United States (Chicago: University of Chicago Press). 6. Andrea Louise Campbell and Kimberly Morgan develop this argument in their analysis examining why payroll tax nancing has declined as a popular model among policymakers for funding American welfare-state programs. They a ribute this decline to the breakdown in the 1970s of a community of policymakers that favored contributory nancing, as well as to the growing political inuence of wealthy citizens opposing social insurance. Andrea Louise Campbell and Kimberly J. Morgan. 2005. Financing the Welfare State: Elite Politics and the Decline of the Social Insurance Model in America. Studies in American Political Development 19: 173-195. 7. Christopher Howard. 1997. The Hidden Welfare State: Tax Expenditures and Social Policy in the United States. Princeton, NJ: Princeton University Press. Howard discusses the history of tax expenditures and reasons for their political a ractiveness. Prasad also explores the potential link between tax progressivity and the growth of tax expenditures in The Land of Too Much; additional comparative work on this link is an important topic for future research. 8. See the Congressional Budget Oces recent report for analysis of how the benets of tax expenditures are distributed by income group. Available from: h p://www.cbo.gov/publication/43768. 9. Scholars have identied other potential advantages to relying on consumption taxes that may explain the relative generosity and redistributive eect of welfare states funded through regressive taxation. Lindert, for example, suggests that taxes on consumption are more favorable to economic growth than taxes on capital. Peter H. Lindert. 2004. Growing Public: Social Spending and Economic Growth Since the Eighteenth Century. New York: Cambridge University Press, p. 235-245. 10. Andrea Louise Campbell. 2011. The 10 Percent Solution. Democracy 19: 54-63. Available from: h p:// www.democracyjournal.org/pdf/19/CAMPBELL.pdf. Campbell also includes recommendations for how the VAT could be progressively structured so it does not disproportionately impact lower-income Americans. 11. Kimberly J. Morgan. 2007. Constricting the Welfare State: Tax Policy and the Political Movement Against Government. Pp. 27-50 in Remaking America: Democracy and Public Policy in an Age of Inequality. Edited by J. Soss, J. Hacker, and S. Me ler. New York: Russell Sage Foundation. 12. Several analyses provide fascinating accounts of the politics and logistics of applying the federal income tax to millions of Americans for the rst time, including the propaganda campaign launched by the government to persuade Americans to le their tax returns. See chapter 4 in James Sparrows 2011 book Warfare State: World War II Americans and the Age of Big Government (New York: Oxford University Press). Also Carolyn C. Jones. 1996. Mass-Based Income Taxation: Creating a Taxpaying Culture, 1940-1952. Pp. 107-147 in Funding the Modern American State, 1941-1995, edited by W. E. Brownlee. Washington, D.C: Woodrow Wilson Center Press.

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13. Andrea Louise Campbell. 2009. What Americans Think of Taxes. Pp. 48-67 in The New Fiscal Sociology: Taxation in Comparative and Historical Perspective. Edited by I.W. Martin, A.K. Mehrotra, and M. Prasad. New York: Cambridge University Press. 14. In an important analysis of the tax revolts, sociologist Isaac Martin demonstrates that rising property taxes prompted mobilization on both the le and the right side of the political spectrum. Progressive solutions (for instance, a means-tested tax limitation, o en called a circuit breaker, or property tax relief nanced through higher income taxes on wealthy households) lost out, however, when California voters endorsed a broad property tax limitation in the form of Proposition 13. The popular endorsement of tax limitation in a liberal and politically inuential state turned tax limitation into a politically desirable policy all over the country. Isaac William Martin. 2009. The Permanent Tax Revolt: How the Property Tax Transformed American Politics. Stanford, CA: Stanford University Press. 15. Monica Prasad. The Popular Origins of Neoliberalism in the Reagan Tax Cut of 1981. The Journal of Policy History 24: 351-383. See also Prasads piece for the Scholars Strategy Network titled How Ronald Reagan Taught Republicans to Love Tax Cuts. Available from: http://www.scholarsstrategynetwork.org/sites/default/files/ssn_key_findings_prasad_on_reagan_and_tax_cuts.pdf. 16. Jacob S. Hacker and Paul Pierson. 2005. Abandoning the Middle: The Bush Tax Cuts and the Limits of Democratic Control. Perspectives on Politics 3: 34-53. 17. Suzanne Me ler and Ma Guardino. 2011. From Nudge to Reveal. Pp. 48-68 in The Submerged State: How Invisible Government Policies Undermine American Democracy, by S. Me ler. Chicago: The University of Chicago Press. 18. During the most active period of tax reform since WWII, between 1960 and 1973, votes on new taxes took place in nine states: Idaho, Maine, Massachuse s, Montana, Nebraska, Ohio, South Dakota, Oregon, and Washington. 19. Elizabeth Pearson. 2012. When and Why Have Americans Supported Higher Taxes? SSN Basic Facts. Scholars Strategy Network. Available from: http://www.scholarsstrategynetwork.org/sites/default/files/ssn_basic_facts_pearson_on_supporting_higher_taxes.pdf

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