THE 10% FLAT TAX: TITHING AND THE DEFINITION OF INCOME

Developing a fair and widely accepted income definition presents one of the greatest challenges to tax reform. To arrive at a definition separate from the federal tax code, we surveyed 1200 Latter-day Saints about their practice of tithing. Tithing is similar to a flat tax with no deductions, where individuals voluntarily contribute 10% of self-defined income to the church. The results of our survey indicate that most respondents operate on a cash realization basis, which excludes savings and does not allow any deductions. Respondents' income concepts generally do not coincide with current tax laws or economists' views of comprehensive income. (JEL H24, Z12) MICHAEL R RANSOM (*) We recommend the passage of [the income tax] in the confident belief that ... [it] will meet with as much general satisfaction as any tax law. ...All good citizens, it is therefore believed, will willingly and cheerfully support and sustain this, the fairest and cheapest of all taxes. Committee Report on the Act Authorizing the Income Tax, U.S. House of Representatives, October 3, 1913 I. INTRODUCTION Much of the discussion on individual income taxation in the United States attacks the exceptions, preferences, loopholes, and complexity of the Internal Revenue Code. Would-be reformers stress the inequities and economic defects that arise due to the current fragmented tax base and argue for a comprehensive tax on income. This approach implies that an income concept exists that is generally agreed on as fair and that can meaningfully be applied to individual taxation. But do ordinary people agree on what constitutes a fair definition of income? And, if so, does the income concept match up with either the current tax code or economists' views of comprehensive income? How individuals believe income should be defined matters for any major reform of the U.S. tax code. First, the electorate's perceptions of what items belong in the income base may well determine what changes are politically feasible. Second, in interpreting the Sixteenth Amendment, the courts have historically relied on an income definition imputed to ordinary citizens. In the landmark case of Eisner v Macomber (1920), the Supreme Court effectively ratified the common man's notion of income for tax purposes. On the theory that the people wrote and adopted the Constitution, Justice Pitney reasoned that "we require only a clear definition of the term 'income,' as used in common speech, in order to determine its meaning in the Amendment." Finally, the importance of the income definition extends beyond political and statutory considerations, because research suggests that the perceived fairness of the tax code also affects the degree of voluntary compliance (e.g., Roth et al. [1989]; Slemrod [1992]; and Tyler [19 90]). Eliciting individuals' beliefs about what belongs in an income base presents many challenges. For example, if directly asked about what is fair for tax purposes, people may respond that no form of income should be taxed or may simply repeat the Internal Revenue Code as they understand it. To arrive at a self-determined income definition free of such biases, we administered a survey to 1200 members of the Church of Jesus Christ of Latter-day Saints (LDS). Church members provide unique insights into income definitions because of their practice of tithing, where individuals voluntarily contribute one-tenth of their income to the church. Because the LDS Church collects tithes centrally and disperses funds locally based only on average attendance at Sunday services, tithes do not represent entrance fees or payment for local public goods. Though the rate of 10% is fixed and not subject to personal interpretation, the definition of which potential income sources to tithe is left to individual conscience. Hence, aski ng questions about what items respondents think should and should not be included in "tithable income" provides an interesting measure of what people regard as income. …