Tax perception distortion

A recent study (1) concludes that a "flat tax system" makes people less happy than a progressive tax regime. This is a "distortion" in the perception of tax systems. A flat tax system had nothing to do with whether the overall tax regime is progressive or not. It is important to get the terminology right. By posing questions this way and conducting irrelevant research, academics create more confusion in the public.

Taxes have to be looked at in its entirety. When an individual pays a variety of taxes – such as sales taxes, property taxes, licenses, capital gains taxes etc. in addition to income taxes, focusing on just one component – that shows up in their pay check explicitly, distorts how she view taxes. The fact that a large number of people prefer "progressive taxes" as opposed to "flat taxes" on income just means that a large number of people think they will pay less in such an income tax regime. Additionally, most do not internalize the cost of collecting" "progressive income taxes" and the cost of compliance. It is estimated that Americans spend 8 Billion hours (3.8 Million jobs) just collecting and filling in the data in the complex income tax forms they are given every year.

Tax policy has to be holistic. It has to take into account both the benefits and costs of taxes. The US can easily create a revenue neutral tax policy that includes a "flat income tax." Such a policy can be designed to be "progressive" if all the components are taken into account. In such a system, property taxes, sales taxes on luxury items and other discretionary items will dramatically increase. An ideal system will be one with zero income taxes that will release nearly 15 Billion hours into the economy immediately – an equivalent of 5 Million jobs. A zero income tax regime can be consistent with progressive taxation with properly designed consumption taxes.

Using labels in the wrong context can be damaging whether it came out of ivy walls or ivory towers.

(1) A More Progressive Tax System Makes People Happier, Association for Psychological Science. http://www.psychologicalscience.org/index.php/news/releases/a-more-progressive-tax-system-makes-people-happier.html