2014 Tax Fairness Survey

by John S Kiernan

WalletHub 2014 Tax Fairness SurveyTax policy—who pays what and how—is a hot-button issue. Politicians from both parties cry out for reform yet there is little consensus about what needs to be done. And while politicians and pundits argue, everyday Americans are struggling to navigate an increasingly complex tax code.

With tax season behind us and the 2014 midterm elections ahead of us, we thought now would be a good time to find out what exactly Americans think of our current tax system and how it could be improved.

To investigate attitudes towards taxation, WalletHub.com conducted an original online survey of 1,086 Americans. The sample was designed to be nationally representative of all Americans by age, race and gender.

Key Findings:

  • More than 80% of respondents rated the current tax code as either “complex” or “extremely complex”
    • More than 40% respondents (44.2%) believe the fairest possible tax code would have fewer deductions than today.
  • 90% of respondents believe income from investments should be taxed at least as much as wages:
    • Well more than half (57.64%) think wages and investment income should be taxed equally; 33.06% say investment income should be taxed more than wages
  • Less than one quarter (24.31%) of respondents support a flat income tax.
  • Almost two-thirds of respondents (65.10%) believe corporations should face higher tax rates than consumers.
  • Americans view taxes on wages and gasoline as least fair; taxes on alcohol and tobacco seen as most fair.
  • Americans view tax fairness (61.23%) and tax equality (20.81%) as more important than whatever is best for the economy (17.96%).

 

Tax Code Complexity

We first asked respondents how complex they would rate the current U.S. tax code:

How would you rate the complexity of the U.S. tax code?
  • When asked how complex they found the current tax code, over 80% responded the current tax code was either “complex” or “extremely complex.” Only 2% of respondents responded they felt the current tax code was simple or very simple.
  • In a multivariate regression framework, education appears to be positively associated with viewing the current tax code as too complex—that is, the more educated you are the more complex you find the current tax code to be.  This is net of differences by income, sex, age, race and region of the country.

One thing that makes our current system so complex is the number of deductions in the tax code. So we asked respondents whether they thought the fairest possible tax code would have more, less or the same amount of deductions, relative to the current U.S. tax code.

The fairest possible tax code would have ________ potential deductions, relative to the current U.S. tax code.

 

  • Less than 1 in 3 respondents think a fair tax code means more deductions.
  • Descriptively, older individuals in our sample were generally more likely than younger respondents to think a fairer tax code would have fewer deductions.
  • Men are significantly more likely than women to think a fairer tax code would have fewer deductions: 48% of men say fewer deductions would be fairer, compared to 36% of women. This difference between men and women is statistically significant in multivariate models controlling for income, age, education, race, and region of the country.

 

Investment & Wage Income

How to tax income from investments relative to wages has been a major area of disagreement among politicians. Current policy taxes income from investments at a lower rate than income from wages; which results in someone like Warren Buffet paying a lower effective tax rate than his secretary.

We asked respondents what they thought is the fairest possible relationship between tax rates on investment income and wages—should tax rates be higher on wages, higher on investment income, or should the tax rates be the same?

Which of the following options describes the fairest possible relationship between tax rates on investment income and wages?



 

  • Over 90% of respondents believe income from investments should be taxed at least as much as income from wages.
  • Descriptively, blacks and Latinos in our sample are more likely to support higher taxes on investments than white respondents.
  • Notably, we did not see any significant differences by income, age or education. Across groups there appears to be strong support for higher taxes on investment income, relative to current policy.

Our current federal tax system has a “progressive” structure, where higher incomes face higher tax rates. Politicians routinely debate how our income tax should be structured: Should everyone pay the same tax rate? How much more should the rich pay relative to the middle class? Should the poor pay any income tax?

To determine what Americans think would be the most fair income tax system, we presented respondents with the following four charts of income tax rates by income and asked them to pick which one they felt was fairest:

Fairest Income Tax Rates
  • Less than one-quarter (24.31%) of all respondents indicated they would prefer a flat income tax whereas more than three-quarters preferred one of the more progressive options.
  • Notable again is the difference between men and women in preferences for a flat tax. Men are more likely than women to prefer a flat tax (29% versus 20%). This difference between men and women holds in a multivariate model: net of age, education, income, race and region, men have 50% higher odds than women of preferring a flat tax option (relative to the other options).

Blue Bubble Text

  • It is interesting that that the most popular choice, Chart C, includes some taxation of poor households. It is hard to determine, however, which features of the tax systems depicted in the charts are driving support. We plan to dig deeper into attitudes towards taxing low-income households in future WalletHub studies.

We also gave respondents an opportunity to describe in words what they thought to be a “fair tax code.” The text bubble here captures some of the most common words and phrases from their responses.

Consumers versus Corporations

Graduated income tax rates aren’t the only way to make the tax code fairer. Respondents also reported that they believe corporations should face a higher tax rate than consumers:

Which of the following options is the fairest possible relationship between corporate and consumer tax rates?


  • Descriptively, we see some evidence in the data that higher income households are less likely than lower income households to support higher rates for corporations.
  • Yet again we see striking differences between men and women, with women significantly more likely than men to believe that higher taxes on corporations is the fairest option: 73% for women versus 55% for men. In a multivariate regression model, net of age, region, education, race and income, women have 228% higher odds than men of supporting a higher tax on corporations than consumers.

 

Most Fair & Least Fair Taxes

Not all taxes are viewed as equally fair. So we asked respondents to rate different taxes based on fairness using a 1 to 5 scale, with 1 being “very fair” and 5 being “not fair at all.”  The chart below shows the percent of respondents who considered each type of tax to be anywhere from “very fair” to “ok” (1-3 on the scale).

Percent Rating Each Tax as 'OK' to 'Very Fair'

 

  • “Sin taxes” on alcohol and tobacco appear to be considered the most fair among respondents in our sample; taxes on wages and gasoline were rated as fair by the smallest percentage of respondents.
  • Multivariate regression analyses suggest that higher income households are more likely than lower-income households to consider alcohol and tobacco taxes as fair.
  • We find it interesting that about one-third (34%) of respondents view taxation on charitable donations—that is, income tax deductions for donations—as unfair. We plan to dig deeper into attitudes towards tax treatment of charitable contributions in future Wallethub studies.

 

Fairness vs. Equality vs. the Economy

Tax systems can affect economic growth by influencing the actions of a range of economic actors from corporations to investors to workers.  Some suggest, for example, that increasing tax rates on income from investments or on corporate profits will have a negative impact on the economy. But we wanted to know what Americans thought was most important: tax equality, tax fairness, or whatever is best for the economy.

What is more important? Tax Equality, Tax fairness, or Whatever is best for the economy?

 

  • Less than 1 in 5 (17.96%) respondents said that whatever is best for the economy is the most important consideration for tax policy.
  • Men appear to be more likely than women to have responded tax equality is most important (relative to the other options). This difference is net of age, income, education, race and region.

 

Ask the Experts

     
  • More than 90% of our respondents believe investment income should be taxed at least as much as wages – what do you think about that?
  • Two-thirds of our respondents felt that corporations should face higher tax rates than consumers – are they right?
  • Respondents in our sample rank taxes on wages and gasoline as the least fair and taxes on tobacco and alcohol as the most fair – what do you think?
  • Our respondents view tax fairness and tax equality as more important than whatever is best for the economy – are they right? What are other considerations?
  • More than 80% of our respondents found the tax code too complex – how can we make it simpler?

 

Back to All Experts

Mark Gergen

Robert and Joann Burch D.P. Professor of Tax Law and Policy, UC Berkeley School of Law

More than 90% of our respondents believe investment income should be taxed at least as much as wages – what do you think about that?

In principle, perhaps yes. As a practical matter investment income is very difficult to tax. My own preference is a wage or consumption tax and a wealth tax with a very low rate, such as .5%.

Two-thirds of our respondents felt that corporations should face higher tax rates than consumers – are they right?

No. The corporate income tax is a mistake.

Respondents in our sample rank taxes on wages and gasoline as the least fair and taxes on tobacco and alcohol as the most fair – what do you think?

The externality problem justifies a high tax on gasoline (even better a carbon tax), just as the externality problem justifies a high tax on tobacco and alcohol.

Our respondents view tax fairness and tax equality as more important than whatever is best for the economy – are they right? What are other considerations?

I am not surprised this is the popular view. Practical and economic considerations dominate tax policy analysis.

More than 80% of our respondents found the tax code too complex – how can we make it simpler?

Eliminate the income tax, including the corporate income tax. Substitute a wage tax or consumption tax, a carbon tax, and a wealth tax.
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Richard Beck

Professor of Law, New York Law School

Two-thirds of our respondents felt that corporations should face higher tax rates than consumers – are they right?

Probably not. Economists disagree about who actually pays the corporate tax, but it is clear that at least some of it is passed through to consumers in the form of higher prices. Better to do it directly with a sales tax instead. Also, corporations that aren't profitable don't have to pay the tax. That subsidizes losing businesses. Our respondents view tax fairness and tax equality as more important than whatever is best for the economy – are they right? What are other considerations?

This seems to me a false choice. Tax fairness is absolutely essential to a healthy economy. They are not opposites at all.

More than 80% of our respondents found the tax code too complex – how can we make it simpler?

Throw out the tax code, and start over with a flat tax that can't be changed without direct referendum of the people. It is hopeless to expect simplification from Congress. Congress is the cause of the mess.
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Alexis Anagnostopoulos

Assistant Professor of Economics, Stony Brook University

More than 90% of our respondents believe investment income should be taxed at least as much as wages – what do you think about that?

The problem with taxing investment income is that capital tends to be much more mobile than labor. This means that high taxes on investment returns could lead to reductions in investment which is not good for anyone. How responsive investment is to tax changes is a subject of controversy, but I think it is fair to say that it is more responsive than labor supply.

This argument has to do with what is efficient, but it abstracts from 'fairness'. It does sound like a fair thing to do to tax capital and labor income equally. But one has to be careful to tax capital income in ways that do not directly affect the returns to investment.

Two-thirds of our respondents felt that corporations should face higher tax rates than consumers – are they right?

It is not clear why corporations should pay taxes at all. Ultimately, any profits corporations are distributed to someone. So, I think it is important to make the tax system more transparent by taxing individuals. For example, if we really think that rich capitalists should pay much more then we can tax them directly. Taxing corporations obscures the tax incidence and that cannot be a good idea. In addition, corporations tend to be very good at avoiding taxes, presumably better than individuals.

Respondents in our sample rank taxes on wages and gasoline as the least fair and taxes on tobacco and alcohol as the most fair – what do you think?

I don't see how fairness can explain these tax differences. It sounds that the underlying idea is that smokers and alcohol drinkers are committing a 'sin' and therefore should be punished with higher taxes. I don't agree with that point of view. However, there are good reasons to tax tobacco (and to some extent alcohol) at higher rates. The reasons have nothing to do with fairness. It is just efficient to do so because smokers will not stop smoking as a result of higher taxes. In a sense such a tax scheme exploits a weakness in people (addiction). So it is efficient, but I would not call it fair...

Our respondents view tax fairness and tax equality as more important than whatever is best for the economy – are they right? What are other considerations?

I think both are important. Society has to decide how to resolve the efficiency vs. equity trade-off on the basis of democratic decision making. But to do so it is important for voters to understand the trade-offs and, in particular, understand the quantitative aspects. That is, I think the decision is not black or white. We have to decide on which shade of grey we want as a society, carefully measure what is the current situation and act accordingly. Academic economists spend a lot of time evaluating this trade-offs and I think their work should play a bigger role in informing public opinion.

More than 80% of our respondents found the tax code too complex – how can we make it simpler?

One way to provide investment incentives is to reduce corporate profits taxes. Importantly, we could do this without putting a higher burden on wage earners by simply increasing shareholder taxation such as capital gains and, especially, dividends taxes. This is not necessarily making things simpler, but it is along the lines of improving the efficiency vs. equity trade-off I discussed earlier.
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Benjamin Russo

Professor of Economics, UNC Charlotte, Belk College of Business

More than 90% of our respondents believe investment income should be taxed at least as much as wages – what do you think about that?

Recall that the Average Tax Rate (ATR) a taxpayer pays can differ a lot from the Marginal Tax Rate. I suspect that the public's views on how taxes should be assessed are based on its views on the financial burden taxes impose. The ATR is a more accurate gauge of financial burden, so I will assume that respondents believe the ATR on investment should be at least as large as the ATR on wages.

If the main goal is horizontal equity, then all sources of income should be treated (taxed) equally and pay the same ATR.

Tax economists have found evidence that taxes on firms' capital investment income tends to reduce that investment and, thereby, economy-wide income per capita (aka, the standard of living). Therefore, if the main goal is the long-run level of the standard of living, the burden on investment income should be lower.

Unfortunately, there tends to be a trade-off between equity and the average standard of living. Where to draw the line between the two results in a dilemma. One approach to mitigating the dilemma would be to apply the same ATR to both types of income, and then transfer some tax revenue to poor folks, to provide them with an acceptable standard of living.

Two-thirds of our respondents felt that corporations should face higher tax rates than consumers – are they right?

I believe a compromise would be to tax all business, corps included, at relatively low ATRs, and raise revenue by taxing consumption. Because this, by itself, would be regressive, some of the revenue from taxing consumption could be transferred to poor folks, in order to meet the public's demand for vertical equity.

Respondents in our sample rank taxes on wages and gasoline as the least fair and taxes on tobacco and alcohol as the most fair – what do you think?

I believe that poor folks tend to spend a higher percentage of their income (and other resources, such as Medicaid and food stamps) on tobacco and alcohol, so the respondents' answers support a regressive tax, which generally is thought to be unfair. On the other hand, taxes on tobacco and alcohol tend to reduce use of these items, especially among young people, which tends to improve health. So, if bad health increases the cost of caring for poor folks, and that cost is taken into account, the 'sin' taxes may not be regressive. Of course, burning gasoline also tends to impose health costs, and this cost is born by many people who don't rely on internal combustion engines to get around. This should be counted as an external social cost, which also may be unfair. I believe the jury is still out on this one.

Our respondents view tax fairness and tax equality as more important than whatever is best for the economy – are they right? What are other considerations?

According to all the public finance texts I have used and seen, the two most important characteristics of the tax system are equity and efficiency (the latter is economist shorthand for whatever is best for the economy). One's view about which of the two is more important is a value judgment, so it cannot be addressed by economic theory. I believe that if the principles upon which our political system is based determine the answer, the public and their elected representatives must decide. But once the fairness issue is addressed, taxes should be levied in the most efficient manner.

More than 80% of our respondents found the tax code too complex – how can we make it simpler?

They are right! To make the tax code simpler, eliminate tax expenditures, such as: special tax treatment of favored industries and groups, the mortgage interest deduction, charitable contributions, moving and medical expenses, child tax credits, Social Security income, etc.
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Dorothy Brown

Professor of Law, Emory University School of Law

More than 90% of our respondents believe investment income should be taxed at least as much as wages – what do you think about that?

I’m glad to see that. Given that only 1 in 4 Americans own stock in a way that is eligible for the preferential rate, it should be repealed. Most Americans will never receive this tax benefit. This raises the question, if most people think the current law should be changed, why isn’t the law changed?

I suspect it’s because members of Congress own investment income and do not represent the interests of most Americans – but their own interests as well as their high income constituents’ interests. I wrote an article arguing that the IRS should study and provide a report on all 535 Congressional tax returns. I believe we would all find out how little the tax experiences of members of Congress are like those of most Americans.

Two-thirds of our respondents felt that corporations should face higher tax rates than consumers – are they right?

Be careful what you ask for. To the extent corporations tax bills increase, they may be able to pass the additional taxes onto consumers in the form of higher prices. Most consumers would be opposed to that. I tend to think that corporations should be subject to similar tax rates as individuals, so that those with the best tax planners are limited in their ability to game the system.

Respondents in our sample rank taxes on wages and gasoline as the least fair and taxes on tobacco and alcohol as the most fair – what do you think?

I’m not sure how they define fairness. I think the preferential rate on investment income is the least fair in terms of tax policy. I don’t know if I think there is a tax that is the most fair, however.

Our respondents view tax fairness and tax equality as more important than whatever is best for the economy – are they right? What are other considerations?

I think equity and fairness in the tax code is very important because ours is a 'voluntary' system. If people lose complete trust in the system, they stop filing tax returns and we revert to chaos. So fairness is important. On the other hand, you don’t want tax policy decisions to make things worse for the average American. I think a balance between fairness; how easy the laws are to administer; and impact on the economy are each factors to be seriously considered.

More than 80% of our respondents found the tax code too complex – how can we make it simpler?

We can enact Simpson-Bowles which would do away with many loopholes and as a result simplify our tax laws, as well as lower the tax rates that we have to pay. But that would mean repealing popular tax breaks, like the mortgage interest deduction. But some studies show that only 1 in 5 homeowners actually benefit from the tax break. So repeal of the mortgage interest deduction would not be nearly as painful as the real estate lobbyists would have us believe. If, however, you asked me to name a single change that would simplify the code, I would say repeal the preferential rate for investment income. That single change would eliminate much of the current complexity found in the tax code. It would also put a lot of tax professionals out of work. No longer would their services be needed to try to make wage income look like investment income. That in my opinion, would be a good start.
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Donna Byrne

Professor of Law, William Mitchell College of Law

More than 90% of our respondents believe investment income should be taxed at least as much as wages – what do you think about that?

I agree. On the first day of class I ask my tax students whether they think earned income should be taxed the same as unearned income -- most semesters they think the unearned income should be taxed HIGHER than earned income (the opposite of our current system). Investment income pays rent exactly the same way wage income does. It should be treated the same for tax purposes.

Two-thirds of our respondents felt that corporations should face higher tax rates than consumers – are they right?

I'm not sure about this one. Reason says no, because any income left over after expenses and taxes is distributed to shareholders in the form of dividends, which the shareholders include in gross income. So corporate earnings really are taxed first to the corporation and then to some extent to the shareholder (it's not actually double, but it is MORE than a sole proprietor would pay on the same earnings).

Respondents in our sample rank taxes on wages and gasoline as the least fair and taxes on tobacco and alcohol as the most fair – what do you think?

Wages and gasoline are not quite as optional as tobacco and alcohol, so I see their point. On the other hand, tobacco taxes hit low income people just as gasoline taxes do. I personally think tobacco should be extremely discouraged, so I don't mind taxing it. But I also think we as a society should move away from gasoline consumption. I see our over-reliance on cars as detrimental to health and the environment, so I'm basically in favor of taxing it heavily. I'm just also sympathetic to the plight of lower income people who have to drive to get to work.

Our respondents view tax fairness and tax equality as more important than whatever is best for the economy – are they right? What are other considerations?

Tax equity and what's best for the economy are not necessarily at odds with each other, although they are often presented as a tradeoff. One reason your respondents may be correct, though, is that our income tax system is largely voluntary -- most of us actually do report our income and send in our taxes. For a voluntary reporting system to work, people have to believe that it is reasonably fair.

More than 80% of our respondents found the tax code too complex – how can we make it simpler?

The tax code IS complex, but most of that complexity is an attempt to make it fair. Bright line, clear rules are more likely to be unfair than more finely tailored rules. For example there is a statute that says gifts are not income. That could be a really simple rule, but Congress had to also explain that a 'gift' from an employer to an employee is NOT a gift. If that language were not there, the statute would be more confusing and would invite abuse.

In other places the reason for the complexity is that a tax break is intended for low to middle income taxpayers, so it includes a phase-out provision for taxpayers above a certain income level. Phase-outs tend to be a little bit complicated so that they phase out evenly instead of all at once.

Finally, some complexity is a result of the tendency of clever taxpayers to figure out ways around clear rules. For example, alimony payments are deductible, but property settlements between divorcing spouses are not. It would be tempting to make all property settlements look like alimony in order to take advantage of the deduction. To prevent this, the alimony deduction includes a complicated provision designed to detect property settlements disguised as alimony. Another rule catches 'alimony' that is really child support (which is also not deductible).
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Robert G. Nassau

Professor of Practice & Director of the Low Income Taxpayer Clinic, Syracuse University College of Law

More than 90% of our respondents believe investment income should be taxed at least as much as wages – what do you think about that?

I believe that ALL income should be taxed at the same rate. Money is money.

Two-thirds of our respondents felt that corporations should face higher tax rates than consumers – are they right?

I believe that corporations should NOT be taxed. I believe all corporations should be taxed liked S corporations or partnerships, with the owners paying tax currently on their shares of the entity’s income.

Respondents in our sample rank taxes on wages and gasoline as the least fair and taxes on tobacco and alcohol as the most fair – what do you think?

I think a tax on income is fair. When it comes to excise/sales taxes, I agree that sin taxes are very fair. I do not think a gas tax is unfair at all.

Our respondents view tax fairness and tax equality as more important than whatever is best for the economy – are they right? What are other considerations?

I essentially agree.

More than 80% of our respondents found the tax code too complex – how can we make it simpler?

I do not believe it is too complex for the vast majority of taxpayers. However, taxing all income at the same rate would go a long way towards simplifying things; that would eliminate a lot of the games/manipulation that contribute to the complexity. Eliminating the corporate tax would also simplify things. I’d also eliminate the estate/gift tax AND stepped-up basis at death.
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Philip D. Oliver

Byron M. Eiseman Distinguished Professor of Tax Law, University of Arkansas at Little Rock, William H. Bowen School of Law

More than 90% of our respondents believe investment income should be taxed at least as much as wages – what do you think about that?

Investment income other than dividend income should be taxed the same as wages. Dividend income should be taxed less or not at all (or, alternatively, the corporation should be partially or fully relieved of taxation).

Two-thirds of our respondents felt that corporations should face higher tax rates than consumers – are they right?

The U.S. should move toward ending the double tax on corporate earnings. The present treatment of dividends (generally taxed at capital gains rates) is a move in that direction.

Respondents in our sample rank taxes on wages and gasoline as the least fair and taxes on tobacco and alcohol as the most fair – what do you think?

The taxes on wages are essential to support the government. If we are ending that, where does the money come from? Gasoline is a good thing to tax, especially considering the externalities, and is a fair tax in that it is tied to the consumption of both roads and to one's contribution to environmental problems.

Taxes on tobacco are quite unfair. There is no justification for beating up on smokers other than paternalism, which is not much of a justification in a free country. There is the asserted justification based on societal health costs, but this falls apart when one considers that smokers die earlier and so get less in Social Security benefits. From a financial perspective, we are benefited by smoking.

Alcohol is a difficult case. There are lots of external costs from drinking --- accidents and disease --- but these arise from excess drinking, not from moderate drinking. So I think one could argue that tax either way.

Our respondents view tax fairness and tax equality as more important than whatever is best for the economy – are they right? What are other considerations?

Interesting to consider what is meant by ‘tax fairness’ and ‘tax equality.’ Are they the same? If so, is this a repudiation of progressive taxation? At the extreme, ‘tax equality’ could mean a head tax, but I doubt that many are suggesting that.

Because nobody has much idea what ‘fairness’ consists of, and because the record of tax law in furthering the economy has been pretty dismal, I would suggest that ease of compliance and ease of enforcement (which leads to fairness because almost all will pay if enforcement is good) should rank near the top of the list.

More than 80% of our respondents found the tax code too complex – how can we make it simpler?

Of course the Internal Revenue Code is too complex. The best thing Congress could do – and the least likely – is to stop changing it so often, which would allow people to catch up to the law.

Probably adoption of a value added tax would simplify the tax law to some degree. I would keep the income tax, though, at lower rates – which would make the complexity less important because less would be riding on it. A value added tax would help make American business more competitive vs. foreign businesses located in countries with a value added tax (which is almost every country).

 

Methodology

This report was written using data collected through an original online survey of 1,086 Americans. The sample was collected to be nationally representative of all Americans by age, race and gender. In separate analysis we additionally weighted the data to be nationally representative by education using data from the US Census’ Current Population Survey—results are substantively similar to before and after adjusting for education. All descriptives presented above are unadjusted results above.

Regression models on ordinal (e.g. 1-5) outcomes are robust to both ordinary least squares and ordered logit model specifications. Binary outcomes (and outcomes bounded by 1) are estimated using logistic regression and are also robust to OLS specifications. Descriptive statistics presented are for the full sample (n=1086). Missing data in multivariate models are dealt with using listwise deletion. Analytic sample size for all multivariate regressions is n=896.

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John Kiernan is Senior Writer & Editor at Evolution Finance. He graduated from the University of Maryland with a BA in Journalism, a minor in Sport Commerce & Culture,…
1181 Wallet Points
Many retirees depend on investment income as their primary means of support. This should be reflected in the code. Perhaps the first $50,000 or so should be excluded or taxed at the lower rate. This would avoid hurting those in a vulnerable position while still collecting plenty from the billionaires.
Jun 2, 2014  •  Reply  •  Flag