US tax system not perceived as fair according to report

Yesterday I provided some information from The Tax Institute at H&R Block’s annual survey of taxpayers. The study found that most Americans weren’t very knowledgeable about the tax laws that impact their pocketbook and should inform their financial decisions.

What I didn’t report, and what I found more interesting, was the finding that a whopping 92 percent of those taxpayers surveyed could not describe the U.S. tax system as "very fair." While “very fair” may be a high threshold, it shows me there is a lot of room for improvement since the best tax systems are perceived as fair.

To me, the fairest system is a progressive system with increasing marginal tax rates. Increasing marginal tax rates means that tax rates increase as income increases, but only at the margin. For example, if marginal rates increased every $50,000, then the first $50,000 everyone earns would be taxed the same regardless of total income, while those who made between $50,001 and $100,000 would pay slightly more on that income than on their first $50,000. In this example, the marginal rate would go up until it reaches the maximum rate.

The theory behind this is based on the utility of money. The less money you earn, the more valuable and vital each dollar is to you, while the more you earn decreases the utility of the subsequent dollar. A $1,000 to me and a $1,000 to Bill Gates are two very different amounts.

I’ll continue with this discussion the next time I blog.