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A recent paycheck for Delores Leonard shows her hourly wage of $8.25 for working at a McDonald's Restaurant, the minimum wage in Illinois, in Chicago, Illinois, September 29, 2014. Leonard, a single mother raising two daughters, has been working at McDonald's for seven years and has never made more than minimum wage.  Picture taken September 29, 2014.   REUTERS/Jim Young (UNITED STATES - Tags: BUSINESS EMPLOYMENT) - GM1EAAH1MI601
Up Front

It’s tax day. Here are 10 things you should know about the US tax system

In honor of April 15, read the latest from our Economic Studies scholars on taxes and the Tax Cuts and Jobs Act (TCJA).

On taxes in general:

1. Most Americans support increasing taxes on the rich

A woman holds a sign supporting the taxation of big businesses during a protest in front of the Amazon Spheres to demand that the city of Seattle tax the largest corporations to help fund affordable housing, according to organizers, in Seattle, Washington, U.S., April 10, 2018.  REUTERS/Lindsey Wasson - RC1F0EDB1690

Isabel Sawhill and Chris Pulliam find that while public opinion toward specific tax proposals varies, most Americans are in favor of increasing taxes on the wealthy and corporations. However, average federal tax rates on the top one percent have remained stable since 1979, reflecting the trend of elected officials being more responsive to economic elites and business interests than to the average citizen.

2. The U.S. gas tax is one-sixteenth the size of the petroleum tax in other G7 countries

Traffic is pictured at twilight along 42nd St. in the Manhattan borough of New York, U.S., March 27, 2019.   REUTERS/Carlo Allegri - RC1EE0EFBE00

In 12 framing facts from his new book, “Fiscal Therapy,” William Gale outlines a plan for a carbon tax that would make us a leader in combating climate change while providing assistance to workers affected by subsequent declines in the coal industry.  Check out Gilbert E. Metcalf’s recent Brookings Papers on Economic Activity paper for more details on the potential impacts of a carbon tax on emissions and the economy.

3. 1 out of every 6 dollars owed in federal taxes goes unpaid

Four thousand U.S. dollars are counted out by a banker counting currency at a bank in Westminster, Colorado November 3, 2009.  REUTERS/Rick Wilking/File Photo   - S1AETLQOGEAA

Tax evasion—the act of not paying taxes that are owed, either deliberately or unintentionally—amounts to about three-quarters of the annual federal budget deficit. As William Gale and Aaron Krupkin describe, evasion is most prevalent for income taxes, and can be combatted with administrative design that reduces the reporting burden on individuals.

4. The US is the only OECD country without a value-added tax (VAT)

A duty free shop belonging the the Dufry group in a departure lounge at Denpassar international airport in Bali March 23, 2017.       REUTERS/Thomas White - RC1F26F19DE0

Isabel Sawhill and Chris Pulliam recommend implementing a VAT (the equivalent of a national sales tax, with specific provisions to ensure fairness) in order to raise revenue in a transparent, simple fashion.

5. The income tax system consolidates and simplifies access to and administration of social programs

Copies of tax regulations are seen during a markup on the "Tax Cuts and Jobs Act" on Capitol Hill in Washington, U.S., November 15, 2017. REUTERS/Aaron P. Bernstein - RC16E6370500

While the tax system is undeniably complicated, William Gale argues that by offering “one-stop shopping” for citizens to access a wide range of public programs, the income tax actually makes life simpler than it could be.

6. The growth of the gig economy is making tax compliance more difficult for the average worker

Photo by Joseph Gruenthal on Unsplash

An Urban-Brookings Tax Policy Center conference addressed what we know about the gig economy and considered ways the tax system should adapt.

On the Tax Cuts and Jobs Act (TCJA):

7. The TCJA improves the revenue code in some ways, but falls short on economic growth, fiscal sustainability, and distributional effects

The Presidential seal is placed upon the lectern before U.S. President Donald Trump delivers remarks celebrating six months since his tax cuts victory at the White House in Washington, U.S., June 29, 2018. REUTERS/Kevin Lamarque - RC15EF5787B0

William Gale explains that while the TCJA will simplify tax filing and create some new investment incentives, it will have a negligible impact on economic growth, increase deficits, and increase income inequality.

8. The TCJA increases the overall financial burden on lower- and middle-income households

Delores Leonard (C) walks her daughters Emmarie (R) and Erin to school before heading to work at a McDonald's Restaurant in Chicago, Illinois, September 25, 2014. Leonard, a single mother raising two daughters, has been working at McDonald's for seven years and has never made more than minimum wage.  Picture taken September 25, 2014.   REUTERS/Jim Young (UNITED STATES - Tags: BUSINESS EMPLOYMENT) - GM1EAAH1MS901

Because tax cuts are typically paid for with offsetting decreases in government spending, their full effect cannot be understood by calculating changes in tax burdens alone. Adding financing into the equation, William Gale finds that the TCJA will raise the net burden on the bottom 60 percent of households, while reducing the burden on the top 40 percent of households.

9. The TCJA significantly reduced total tax revenues in 2018

U.S. dollar banknotes are seen through a printed stock graph in this illustration taken February 7, 2018. REUTERS/Dado Ruvic/Illustration - RC1DFD864050

While policymakers hoped that the tax cut would “pay for itself” by spurring economic growth, William Gale and Aaron Krupkin show that 2018 revenues fell short of predictions, mostly due to reductions in corporate and personal income tax revenue.

10. AOC wants to raise tax rates on high earners as high as 60 or 70 percent—but the TCJA already did

Rep. Alexandria Ocasio-Cortez (D-NY) looks on as bank ceos testify before a House Financial Services Committee hearing on "Holding Megabanks Accountable: A Review of Global Systemically Important Banks 10 Years After the Financial Crisis" on Capitol Hill in Washington, U.S., April 10, 2019. REUTERS/Aaron P. Bernstein - RC18D59A9B90

Adam Looney explains a poorly understood aspect of the bill which subjects executive pay in excess of $1 million to both state and federal corporate taxes, affecting around 18,000 employees and expected to raise about $1 billion per year.

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