- only 50% of those surveyed knew that property tax and mortgage interest are tax deductible
- only 33% knew that APR stands for “annual percentage rate”
- only 32% could name the required deductions that are taken from their paycheck.
I bring this up because I am constantly puzzling about how to make taxes seem interesting to people and I think part of the problem is that most people understand very little about their own finances, and asking them to understand the various kinds of taxes attached to almost every financial transaction is just beyond the realm of possibility.
For example, many progressive tax reformers suggest getting rid of the mortgage interest deduction because it is wildly regressive, with far greater deductions going to high wage earners. The tax savings for households earning more than $250,000 is 10 times the tax savings for households earning between $40,000 and $75,000 a year, according to recent research by James Poterba and Todd Sinai. The deduction may encourage people to buy bigger and more expensive homes than they can afford, and it does not really help a low income person buy a home. Canada does not have a mortgage interest deduction. There are good arguments in favor of the deduction also, but all of this is moot if no one understands mortgage interest in the first place.
Ditto for the discussion about whether capital gains should be taxed less, the same as, or more than, income. Since most people don’t know how it is taxed now, (far less than income) or how it was taxed under President Eisenhower (more than income), they will not be able to join the debate.
And without robust, vibrant, knowledgeable debate about taxes and tax policy, we will stay a nation that claims to believe in equality, but in practice implements systems that on a daily basis make a minority of people richer and richer and the majority poorer and poorer. Financial literacy may be the needed first step for any real meaningful reform.