The Intersection Of U.S. Tax Law And Democracy

Professor Clint Wallace of the University of South Carolina School of Law discusses his argument for using tax policy to reinforce democracy.

This transcript has been edited for length and clarity.

David D. Stewart: Welcome to the podcast. I’m David Stewart, editor in chief of Tax Notes Today International. This week: tax and democracy.

An issue widely discussed outside of the tax arena in the last decade has been the retreat of democracy in a number of countries. But as we’re fond of saying here, there’s always a tax angle. Our guest this week has suggested that there is a role for tax policy and has written a paper on how to rethink the relationship between tax and support for democracy.

Joining me now by phone to discuss more about this is Clint Wallace, author of the paper, “A Democratic Perspective on Tax Law.” Clint, welcome to the podcast.

Clint Wallace: Thanks for having me, Dave, and thanks for the work you do at Tax Analysts. I’ve appreciated it a lot.

David D. Stewart: So could you start off by telling listeners a bit about yourself?

Clint Wallace: Sure. I started working after college for a politician in Michigan, the governor of Michigan, and I eventually was her speechwriter, but in that role got some exposure to some state-level tax policy stuff that she was working on.

And I went on to work for Carl Levin, who [was] a senator from Michigan, and he was chairman of the Permanent Subcommittee on Investigations at that time. And shortly after I started with him, his committee received this leak of files from UBS, from Bradley Birkenfeld, who is one of the first or maybe the most notorious tax whistleblower.

So I was tangentially involved in that investigation and work, but there was a lot of focus by Senator Levin and his staff on what he called tax secrecy jurisdictions and Swiss banks and all of that kind of thing. And it really captured my interest. So eventually from there, I went to law school, and I went in focused on tax law already at that point.

David D. Stewart: It’s an interesting story of your career because as a relatively new reporter, I covered those UBS hearings.

Clint Wallace: Oh, cool. Interesting. Yeah, I mean there was a lot of drama that unfolded live in the hearings because we’d been working on it for a while, but the information came out on the eve of the hearings, and it was very exciting.

David D. Stewart: Yeah. Well, let’s turn to the subject at hand today and the article you’ve written, “A Democratic Perspective on Tax Law.” Could you give us just the brief overview of this article?

Clint Wallace: I started with two related observations. First, over a number of years, I read news reports about various autocracies and dictatorships around the world using tax policy to help the leaders maintain their power. And I think one that caught my attention in particular was towards the start of the Syrian civil war.

The Assad regime introduced what they called a reconstruction surtax, and it was supposed to help rebuild the country in their branding from the destruction of the anti-government insurgents they had wrought at the start of the civil war. But the tax in that case was really used to prop up the Assad regime and strengthen his position and popularity in the country at a tenuous time.

And so there were repeats of that in North Korean tax policy and in Russian public finance. And it just seemed odd to me that in these countries, if you looked at it from a democratic country perspective, you had these leaders imposing tax policy that really ran roughshod over all of the criteria that we would generally use to evaluate tax policy, you know, efficiency and equity and administrability.

But nonetheless, these were, from the leaders’ perspectives, successful tax policies. So that struck me as both problematic but also maybe informative for how we think about tax policy in democracies and in the U.S., and I asked, “Are there circumstances in which democratic governance goals might trump these traditional criteria for evaluating tax policy?” And that’s how I got started on this with that comparative point.

David D. Stewart: All right, so let’s dive into it then. You mentioned how you’re seeing the approach to tax in these nondemocratic states. What are we doing in democracies to marry up tax policy and democracy currently?

Clint Wallace: The start of my critique is that we’re not thinking about this consciously enough, and we’re not doing enough. I saw signs that in the U.S., we’re either ignoring or misusing tax policy in ways that don’t further democratic goals. And around the same time, there’s these measures of democratic vitality in countries around the world. And we’ve seen over the past decade or so a real reversal of democratic expansion.

So democracies are in many ways on the ropes and moving backwards in terms of what try to be objective measures of democratic vitality. And in the U.S., we’ve seen some of that, where even though tax law scholarship and tax policymakers haven’t really been thinking about democratic values, scholars and policymakers in other areas have pointed to tax law as maybe a source of answers for problems that they’re facing in their own fields.

So one example, and there are lots and lots of these, but there’s a Supreme Court case fairly recently, Cedar Point Nursery v. Hassid, where the Court held that the takings clause really limits the extent to which workers can organize under state labor laws.

So one response to that from some labor law scholars was, “Well, maybe there are ways to use the tax system to re-balance the power dynamics between labor and management where the pendulum has swung too far in one direction with these new limitations.”

So we’ve seen that in other areas of law as well. These people pointing to tax law as a source of solutions is something that I think tax scholarship and tax policymakers aren’t very well equipped for. So that gets into the problem that I’m trying to answer, but there are a lot of directions to go with it with that set up I guess.

David D. Stewart: Now here in the U.S., we have — a lot of policy gets run through the tax code. There’s — a lot of spending priorities are handled through the tax code. Other policy levers are pulled via the tax code for various reasons. Does that sort of enhance the need for this additional level of thought about the support for democracy?

Clint Wallace: I think in some ways it does. It also enhances the opportunities. So what I propose in very broad strokes is when designing or reforming tax policy, we should ask, “Does a change in this tax rule strengthen or undermine democratic governance? Or alternatively, in the same vein, what tax laws and policies can best encourage and promote thriving democratic citizenry and practices and that kind of thing?”

And I don’t think that the sprawling nature and many missions of the IRS and the tax code today are necessarily problematic in answering those questions in ways that are productive and democracy-enhancing. But they definitely do make it more challenging. And I do think that a major challenge to successfully advancing democratic governance in the U.S. is that there’s just immense complexity in the tax code. And that’s a challenge as far as helping people appreciate that there are good reasons for things that they don’t like.

David D. Stewart: That leads me to the next thought I had about this. Once every year, the entire country basically comes together for a tax event in advance of April 15 to prepare and make sure that they filed their income taxes. And on that form, there is one little issue of democracy. There is the opt-in or opt-out of putting $3 into the presidential election fund.

Does having that annual event where everyone comes together and looks at taxes — is that a positive or a negative for this idea of supporting democracy through tax?

Clint Wallace: Well, I think that it could be a positive, but the federal election funding check[box] is an example of how we botched the opportunity to make it something good.

So for most people now, tax season really conjures feelings of dread and, at the very least, uncertainty and probably fears about negative interactions with the IRS. So there was a recent survey that found that only 75 percent of people are satisfied with their personal interactions with the IRS. And that’s really terrible. If you were a business, if you were a retail or service industry business and a quarter of your customers are dissatisfied, you probably won’t last much longer. So there are serious problems in how the tax code is administered, and I think that filing season or tax filing on an annual basis is part of that problem.

So there are some scholars who’ve made the case that April 15 is a moment for us all to come together and it’s community building and we’re all doing the same thing at the same time. And there’s something good about that from a democratic or civic perspective, but unless that process is something that’s satisfying and that makes sense, it can’t serve that purpose.

I think the federal election check[box] is a perfect example of something that’s absurdly wrong because one, almost no presidential candidates, at least for the last 20 years or so, have used that matching funding. Maybe 2004 was the last time that it was actually used. So it’s not real. There’s no way to see this action you take have an effect in the real world. And it’s so modest and minor and esoteric that most people don’t really know what it is or what it’s doing.

So I can imagine a world — and there’s a great article by Saul Levmore that makes this case that you could use tax return filing or tax obligations as a way to let people express their interests and preferences and then use that in some version of real policymaking. And there are versions of that that could be really cool and dynamic and community-building and democracy-enhancing.

But we’re so far from that that [it] seems really pipe dreamy. I would focus more immediately on either more modest things that we could do to make annual filing less of a debacle for most people and at least not a negative experience from a democratic perspective.

David D. Stewart: Let’s talk now about the criteria that you’re suggesting should be used as policymakers are doing their work. What should they be looking at as they consider new tax policies?

Clint Wallace: I propose three prongs to think about, and I do want to say I introduced these as a first go or a first volley. I think that if people are thinking about democracy and tax together and thinking about it seriously, there are a lot of different ways to go and arguments to be made in terms of how to promote democracy and what to think about.

I take the following as low-hanging fruit that I would focus on first. The first is using the tax system to promote faith in democracy. And I described two elements of that.

First, that there’s some communicative opportunities in how the tax system is in certain messages embedded in our tax rules and in our tax obligations so that we can use the tax system to effectively say, “Here are shared obligations and shared concerns that we have, and this can link us together and make us feel more cohesive.”

And that could be done by the things that appear on tax returns or that appear in tax communications and describing the things that your tax dollars are paying for or allowing you to express the priorities that you have for your tax dollars and how they’re spent. But it also could be as simple as making more clear ways that we’re in this together and just doing some PR messaging around various elements of ways that people interact with the tax system.

Then the second part of promoting faith and democracy that I see is just expressing competence.

So the government expressing competence, and that means things like not having irrelevant checkboxes on the tax return that make no sense to people; doing the things that we’re supposed to do more effectively, like have the IRS not have enormous backlogs of filed returns and that sort of thing; producing guidance and materials for taxpayers that actually that are more helpful and more explanatory.

And some of these things are long-standing critiques of how the IRS has operated, but I think that you get to different places with them if you’re thinking about the audience as democratic citizens as opposed to sources of funds. So a competent government indicated through good tax guidance with an eye towards democracy helps people understand why they’re doing X, Y, Z or what their money goes to, not just how to get to the technical right answer.

And one example that I think of with this is, for any new employee, the first thing your employer asks you to do is fill out a [Form] W-4 to indicate how much withholding the employer should do on your behalf. And it’s totally inscrutable. Most employers won’t give guidance on it because they’re not the taxpayer. The employee mostly doesn’t understand what the form means or what the implications are of checking different boxes on it. The instructions are pretty technical and hard to understand if you’re not a lawyer or someone who knows about tax already. And that’s probably the worst part of a first day experience that some jobs that you have to take this thing home and figure out what to do with it.

So a customer service component to tax administration or more of a customer service component, again with an eye toward democracy, could go a long way in this regard.

David D. Stewart: Taxes are basically — you’ve alluded to before — generally seen in a negative light. Is it really possible to counter that perception?

Clint Wallace: I think that it is, and there’s other ways that I would gauge democratic vitality in tax policy as well. And that relates to this, I guess. So yeah, taxes are viewed in a negative light, but it depends a lot on how you ask the question.

So yeah, people don’t like paying taxes, but the IRS every year does this big survey of taxpayer attitudes and Pew Research collects a bunch of data on how people think about taxes as well. And they very consistently show that most people, like in the 90 percent, think that it’s every American’s civic duty to pay their fair share of taxes.

And most people, over 90 percent, think that paying all the taxes you owe is important to being a good citizen. So yeah, there is negativity, but the negativity is it’s about part of the experience, not necessarily the fundamental mission of providing, pooling resources for the common good.

So I think that designing tax administration and substantive tax policy in ways that promote faith more strongly can counter that, but that data gives good reason to think that it could work.

One thing that people very much are bothered by is how much they pay in taxes. And unfortunately, we’re really moving in the wrong direction on that front. Even as tax burdens have generally gone down over the last 40 years, this year 71 percent of people say they’re bothered a lot or some by the amount of money that they personally pay in taxes, and that’s up from 56 percent in 2019.

So people are increasingly unhappy in some respects that are disconnected from what they are actually paying, at least in broad historic terms. I think a lot of that goes to the increasing complexity and the challenges that people have understanding why they’re paying and understanding what the rules are.

People are really baffled by what they’re actually doing, why they have these various obligations. I see this a lot here at University of South Carolina. I lead the law school’s volunteer income tax assistance program. So we have a few hundred low-income taxpayers coming in every year, and students help them prepare their tax returns, and very consistently, people are totally baffled about what information they need to provide, why they’re providing it, what the mechanics are of accounting for their income in the previous year.

And that dissatisfaction doesn’t really link to how much they’re paying. Most of these people get refunds, but it’s really a problem. So it’s about that has a lot to do with complexity rather than the actual numbers of what people have to part with.

David D. Stewart: Is there any way to overcome the more political will dynamic of this? It seems that every election season, we hear about all the tax cuts we could be expecting, or if it’s tax hikes, it’s for someone else. So how do you get past that sort of dynamic?

Clint Wallace: Yeah, I mean, I think that the politics are very challenging and maybe are the whole challenge. The tax code is all Congress’s doing, and in a lot of ways, the IRS has its hands tied. They’re the victim or the recipient of a lot of finger pointing, but they have an incredibly complex system that they’re dealing with and a huge number of taxpayers and returns and situations that they have to account for.

So I do think that’s challenging, but I also think that we’re unfortunately this democratic tie-in, we may be reaching a breaking point where we’re four decades into the solution to almost any tax problem being “Let’s cut taxes more.” That’s been the trend since the ’80s, and people are increasingly dissatisfied.

So we need some different answer. And I do think that part of it is refocusing who we’re trying to serve with the tax system, and it has to be about regular people’s experience in interacting with their government through paying taxes. So it’s not just tax cuts at the top or modest tax cuts in the middle or at the bottom. It has to be about how that’s presented to people and what their experience is of getting these tax cuts.

In another project, but one that I see very much related to this, I’m proposing what we’re calling a luxury emissions tax. That would be a version of a carbon tax that is focused on emissions produced by the ultrawealthy.

So it’s a highly progressive version of a carbon tax. That’s not something that tax people have really thought about, or it’s not the thing that tax people would be drawn to because the traditional criteria for tax policy would say that the best tax, and the best any tax, but the best carbon tax would be at a low rate on a broad base. So for two decades, we’ve had carbon tax proposals or cap and trade proposals that try to do that — impose a low cost across a broad swath of people or businesses — and we’ve got nowhere with that.

So I think we do need to rethink how we approach things, how we approach tax reform politically. And if we do that — or we can do that in ways that introduce new frontiers for tax policy. And I see a luxury emissions tax is something that we should be able to agree that we need to reduce carbon emissions very broadly.

We should be able to agree that we can distinguish between some carbon emissions that are absolutely necessary and things that we’re going to need to keep producing, whereas others are superfluous and not necessary. And we should be able to agree and find, I think, broad support and democratic support that we should tax things that are bad instead of taxing things that we celebrate.

So why not tax unnecessary carbon emissions by a small portion of the population, which by the way adds up to a lot of carbon, instead of taxing broadly people’s commute to work when we should be celebrating or encouraging work? And that’s part of our culture is to value work.

So I think things like that are distinctive from tax policy ideas that we’ve batted around in the past, but that’s the sort of territory I want to get us into.

David D. Stewart: Now are there any ideas that you’ve seen in use somewhere around the world that you think would be good to import?

Clint Wallace: Absolutely. I mean, many, many countries have free filing systems where people can file their tax returns directly with the tax authority without charge and do it through the tax authority. We don’t have that here. We have a system where you almost invariably have to file your individual tax return using a tax preparation service or mailing it. So that’s something that’s a known thing that we certainly could adopt and many, many advanced countries have that in place.

Similarly, and a step further, a lot of countries have a return-free system where there’s dynamic withholding for workers through the course of the year, and then the government, the tax authority, reconciles the reporting with information they receive from your employer, from other sources, and provide you with a tax bill or tax refund based on their own analysis.

So that’s something that would get around the whole convention of tax filing. In the U.S., we have neither of those. There’s been some work — the Inflation Reduction Act included some funding to study the possibility of a direct-file system, and that looks promising, but there’s a long way to go to get it in place. But that’s the sort of thing that I think other countries do really well that we’re way behind on at this point.

David D. Stewart: I guess to reverse that question, is there anything that we’re currently doing in the U.S. that could be useful to other countries?

Clint Wallace: Well, despite the fact that people don’t like taxes here, we actually do have a very, or a relatively, strong tradition and practice of self-assessment and of people being very honest with the IRS.

It’s hard to export that, but it is a good point of contrast that here cheating on taxes is seen as bad, and in some other countries, it’s borderline celebrated by leaders and by the citizenry at large.

So that’s something that I think, I’m not quite sure we export it, but at least we should be appreciative that we have that civic-mindedness. And there are some troubling trends going against that with people being less likely to say they think the tax laws should be enforced broadly or that people who cheat on their taxes should face significant sanctions.

But those numbers are still very high. That’s pushing 90 percent of people think that no one should cheat and if you cheat, you should be caught and should suffer consequences. So that’s something we have going for us, but it is tough.

David D. Stewart: Now, you mentioned earlier an idea of a luxury carbon tax. Are there any other new tax policies we could expect to be created under this framework that you’re suggesting?

Clint Wallace: Yeah. So the other thing that I confront in the article is the debate about wealth taxes. I think that a lot of that discussion in political spheres has invoked democracy and talked about power imbalances and the wealth and power at the very top of American society and how a wealth tax would counter that and how that would be good for governance in various ways.

But that’s really not reflected in academic debates and discussions about wealth taxes. And I think that’s a deficiency because we could take that description by people who are advocating wealth taxes more seriously and think about it in a more pointed way, either to critique or advance wealth taxes as a genre of tax or to help shape actual policies or proposals in ways that will be productive in democratic terms.

I guess I had skipped past some other elements of what I see as democracy criteria for evaluating tax policy, but another element of this is that taxes or tax policy could be used to support democratic participation and that could be literally through filing obligations or that kind of thing, or it could be the ways that revenue is used. It could be, in the case of a wealth tax, you could make wealth-tax-oriented arguments.

And I think that this is basically what Sen. Elizabeth Warren [D-Mass.] and [Sen.] Bernie Sanders [I-Vt.] make the core of their democratic argument: That by taxing this group at the top end more, we would be reducing their economic power, which would then reverberate into reducing their political power in a manner that’s important for equality of power in a democratic government.

So I think that that’s a way to evaluate wealth taxes and an important one. And I also think they’re thinking about power dynamics a little more broadly, not just in terms of democratic participation.

You could argue that wealth taxes could re-balance not just political power, but economic power more broadly where you wouldn’t have quite this concentration of economic decision-makers in such a small handful of people who can really affect the lives of millions or tens of millions of us with decisions they make entirely unilaterally because they control so much and their economic reach is so significant.

So I think wealth taxes are definitely something to consider from a democratic perspective and think through some of the details in democratic terms.

David D. Stewart: Up until now, we’ve been discussing changes to the existing system or additions to the existing system. Should we actually be talking about perhaps a wholesale change in the tax system?

Clint Wallace: I think so. I mean, we’ve been talking about a lot of the same problems in a lot of the same ways for a very long time now.

There’s the IRS. Each year, the taxpayer advocate puts out a list of problems, or I think they call it the most serious problems list, and they’ve been doing that for about 25 years now. And the problem 25 years ago was complexity in the tax system, sort of a dumb metric, but 25 years ago, the tax code was about 3,000 pages long. Today the tax code is 4,000 pages long. So it’s just bulked up and bulked up and bulked up. And it’s gotten more and more complicated in lots of ways. And there’s some necessary complexity because the world’s complicated and the tax system is trying to do a lot as you pointed out at the start. But it’s also — there’s a lot of unnecessary complexity in there, and there’s a lot of stuff that’s really hard to reform piecemeal, and maybe some massive, serious reconsideration would do it.

And I guess going back to what I was saying before, we tax a lot of things now that are things that we value as a society. Our main source of tax revenue is income taxes from wages of workers. So if we took seriously that one superpower of taxes to discourage things, then we could reorient tax around things that we do not like and that would be a very wholesale change, but would be a way to re-imagine how the tax system works.

David D. Stewart: All right, my final question for you is that in this complex system, we are asking the IRS to do a lot. There is a lot of different policies that they have to implement through the tax code. Should we be looking at additional institutions or some other reform in that area?

Clint Wallace: I think the IRS is capable of doing all these things, and a lot of the things that it’s asked to do make sense to do together, but it is problematic that the IRS in particular has such trouble getting sufficient funding from Congress and is so strapped for resources and so stretched in so many ways that at some point, especially if what happens over the next few years is that this funding bounce that the IRS was given, that was supposed to help it finally actually achieve its many, many missions, if they’re not able to hold onto that money and make good use of it, I do think that the next best option is to have other parts of the government deal with some of these things.

I don’t think that it’s necessarily that the IRS can’t do what it’s been tasked with, but that is the case given the real world that it’s operating in and the number of people that the service has available and the expertise and training necessary to bring people up to speed and all of that. It’s an immense challenge, and it’s a lot for one beleaguered agency to handle for sure.

David D. Stewart: Well, Clint, this has been a great discussion on a fascinating topic. Thank you so much for being here.

Clint Wallace: Yeah, thank you. I really appreciate it.