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Americans are eager for tax reform: Survey

Tax policy reform is king in this election.

That's the finding of a recent survey of 1,040 individuals conducted by WalletHub, a provider of free credit scores and reports.

Nearly 57 percent of participants said that "tax fairness" — what people should pay and how much — was more important than "whatever is best for the economy," which garnered close to 23 percent.

And when it comes to taxes on the well-to-do, two-thirds of those polled said they preferred Hillary Clinton's plan to tack on a 4 percent surcharge on incomes exceeding $5 million.

Meanwhile, 32 percent said they preferred Donald Trump's proposal to lower the top federal income tax bracket to 33 percent from its current 39.6 percent. WalletHub polled people online from Aug. 26 to Aug. 29 and the survey has a 3.1 percent margin of error.

The focus on tax fairness may stem from Americans paying closer attention to their personal finances.

"Consumers are spending more than they should over the past few years," said Jill Gonzalez, an analyst at WalletHub. "They're thinking more about their bottom line personally than the entire nation's bottom line."

"With less than two months until the election, survey participants have also come up with a wish list of tax changes they'd like to see to make the system more 'fair,'" Gonzalez said.

For example, seventy-three percent were in favor of a tax plan where levies increase with income. "Most people think everyone should be taxed," said Gonzalez.

Levies on investments

About 90 percent also supported taxing investment income at a higher rate, akin to the federal income tax brackets.

The highest income earners pay a 20 percent tax rate on long-term capital gains and qualified dividends. There's also a 3.8 percent net investment income tax on top of that rate if your modified adjusted gross income meets the $200,000 threshold (for singles) or $250,000 for married filing jointly.

In comparison, 2016 wages — ordinary income — have a top tax bracket of 39.6 percent for singles whose income exceeds $415,050, or $466,950 for married taxpayers who file jointly. Short-term capital gains are also subject to that rate.

Respondents in the WalletHub study also wanted to cut deductions, which filers use to reduce their taxable income. Forty-seven percent said that the fairest tax code would have fewer of these breaks.

The experts' take

Separately from the participants in the WalletHub survey, experts take a nuanced approach toward tax reform. They see estate taxes as an opportunity for change.

These levies apply to the wealthiest people: In 2016, the exemption is $5.45 million per individual. The maximum tax rate on estates exceeding the exemption is 40 percent.

Tax experts have highlighted President Barack Obama's former proposal to do away with the step-up in basis. The step-up permits decedents to transfer at death assets that have appreciated in value — free of capital gains taxes.

Obama proposed it in 2015, but Clinton has not revived it in her campaign. Trump, meanwhile, has called for an end to the estate tax.

The Tax Policy Center in 2015 said that 10,800 individuals dying that year would have estates large enough to warrant filing an estate tax return. Of those, only 5,330 of them would owe any tax.

"The estate tax is a little redistributive, but it doesn't raise a lot of money relative to the overall budget," said Roberton Williams, a Sol Price Fellow at the Urban-Brookings Tax Policy Center.

An alternative could be to do away with the estate tax and the step-up in basis, which is the case in Canada. There, once an individual dies, the appreciated asset is subject to capital gains taxes, as if the decedent had sold the property to the heir.

"People will say the rich should pay their fair share, but if we eliminate the step-up in cost basis, then that will affect people who don't normally have to pay taxes," said Charlie Douglas, partner and director of wealth planning at Cedar Rowe Partners in Atlanta.

"There's 1 percent that has to pay the estate tax, but many people will have a step-up in gains," he said.

What’s 'fair'?

Tax experts warn against viewing "fairness" exclusively as a way to raise revenue.

"There is a different perspective on fairness if you want to carry out social policy," said Williams of the Tax Policy Center.

"We use [tax policy] to incentivize people to go to college, to encourage employers to provide health insurance and to encourage people to save for retirement," he said.

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