No Taxation without Information

The idea of providing taxpayers with an itemized receipt for their income taxes was recently proposed by Third Way, a center-left think tank. The proposal, which is not entirely new, has attracted considerable commentary. However, there are significant challenges to creating a simple and engaging taxpayer receipt that would provide meaningful transparency for federal spending.

Third Way proposed the receipt idea in a recent issue brief as a tool to inform debate about the federal budget and deficit. To demonstrate taxpayers' ignorance about the federal budget, the paper notes a survey that shows that Americans overwhelmingly – and mistakenly – believed that the U.S. government spends more on foreign aid than on Social Security or Medicare. (In fact, Social Security accounts for around 20 percent of all federal spending, while non-security international spending only makes up one percent.) That misperception persisted through three different surveys from 1997 to 2005.

To provide taxpayers with more information about what they're paying for, the brief proposes providing each taxpayer with an itemized receipt detailing, in dollar figures, their personal contribution to various budget items. The receipt would be delivered online for taxpayers who file electronically and mailed to everyone else. To calculate the individual's contribution to each item, the group proposes multiplying a program's share of the federal budget by the individual's tax payment. The receipt would thus list the individual's contribution toward "twenty to thirty budget items of interest," although how the items would be chosen is not specified in the brief.

Precedents for a Taxpayer Receipt

An early precedent for a taxpayer receipt was a website created by New York City's Independent Budget Office (IBO) in April 1997. The site allowed users to enter their tax totals and receive an itemized receipt for their contributions to federal, New York state, or New York City income taxes. The service for federal taxes was not limited to New York taxpayers. During its lifetime, the service received publicity from The New York Times, CNN, the Federal Reserve Bank of New York, and the National League of Cities.

The IBO service inspired then-Rep. Charles Schumer (D-NY) to introduce the Taxpayer Right-to-Know Act (H.R. 2827) in November 1997, which subsequently received bipartisan support. The bill would have allowed taxpayers to request an itemized receipt when they filed their taxes and required the IRS to establish a website similar to IBO's service. The legislation failed to pass in the 105th Congress, but it was reintroduced in the 106th Congress by Schumer and Rep. Merrill Cook (R-UT) in 1999 (as S. 942 and H.R. 1153, respectively). The Senate bill refined the language, eliminating the provision for a receipt on request but retaining the idea of an interactive website. That year, the Senate attached Schumer's language to the Treasury and General Government Appropriations Act, which was signed into law (P.L. 106-58).

IRS established the website in 2000 (see an archived copy from July 2000). In 2000 or 2001, IBO discontinued its service, referring taxpayers to the IRS site instead (see an archived copy from August 2001). The IRS site was updated in 2001 (see archived copy from August 2001) but was moved or deleted at some point after that. Requests for information from the IRS were not returned.

The IBO calculator was not the only taxpayer receipt for state or local taxes. In 1998, California's Franchise Tax Board created a taxpayer receipt for California income taxes. The site was created in response to a legislative proposal that was never enacted. The site is still in service; however, it received only 2,700 visits between Jan. 1, 2008 and Oct. 5, 2010, according to the board's statistics – a small usage compared to millions of California taxpayers. Even the California Taxpayers' Association was not aware of the service.

Challenges in Establishing a Taxpayer Receipt

While a taxpayer receipt may have some potential to serve as an engaging and easily understood vehicle to convey information to citizens, several challenges would have to be resolved for it to be effective and meaningful. The first and most basic challenge would be to get taxpayers to read such a receipt or use a website containing the information. The low usage in California suggests that changes would be necessary for a federal receipt to be effective. Given the major misconceptions about the use of taxes, the government may not require a very high percentage of use to see a receipt process as a useful tool to educate the public over the long term.

Another challenge would be trying to summarize the complex federal budget in an accessible yet comprehensive way. Although the Third Way brief asserts that preparing a taxpayer receipt would be "really very easy," many subjective decisions would be involved. Deciding how to describe and categorize federal spending could be challenging. For example, the Taxpayer Right-to-Know Act mandates nine broad categories and 19 sub-categories, while independent calculators by What We Pay For and Kareem Shaya use entirely different categories.

Should the receipt list agencies (e.g. Department of Defense) or particular activities (e.g. war in Afghanistan)? Listing the budget per agency would be simple but not necessarily informative. For instance, besides knowing the overall budget for the Department of Education, many taxpayers might wish to know how much spending goes to K-12 education, early childhood education, or postsecondary education. Government activities as seen by the taxpayer do not necessarily correlate to budget lines, and many activities cross agencies (such as educational programs conducted by the National Science Foundation). Because the way that spending activities are described can influence taxpayers' opinions, if a receipt were widely viewed, the descriptions could be manipulated for political purposes.

Another difficulty is how to provide appropriate context to spending information while keeping that information accessible. For instance, rather than merely learning the dollar figure for last year's spending, taxpayers might wish to know how the number compares to recent years or historical trends. In addition, spending does not exist in a vacuum but is meant to address needs or produce outcomes; however, information on merit or performance of the activities is outside the scope of Third Way's proposal. The administration’s launch of the IT Dashboard is a good example of connecting the amount being spent on information technology by agencies with performance to identify over-budget and delayed projects. If a goal of the receipt is to root out wasteful spending, simply listing the amount of spending, but not the achievements it makes possible, will be of limited value.

Finally, although the Third Way brief describes the formula as "very simple," calculating the values of each budget item is complicated by several factors. The Third Way proposal neglects that income taxes and payroll taxes are separate revenue streams. Payroll taxes under the Federal Insurance Contributions Act (FICA) are capped for Social Security, applying only to incomes of $106,800 or less, and go into dedicated trust funds for Social Security and Medicare, thus limiting an individual's maximum contributions to those programs. The proposal also fails to account for revenue sources besides personal income taxes and payroll taxes, which together only account for around 80 percent of federal revenue. Of the remainder of revenue sources, some are earmarked for specific programs, such as the federal fuel tax. Thus, income taxes are not proportional to spending on these programs. In addition, actual spending does not match exactly the amount budgeted, as in the case of programs completed under-budget (in fact, accurate reporting of federal spending suffers chronic difficulties); it is unclear how a taxpayer receipt would reflect this.

Whatever its merits, a taxpayer receipt cannot be considered a substitute for improving detailed spending transparency. The government websites USAspending.gov and Recovery.gov are good examples of government providing detailed spending information to the public. These sites work and should be enhanced to give the public information not only about who is getting how much money, but also whether taxpayer dollars are being wisely spent.

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