Business Students’ Attitudes toward the Flat Tax: A Case of Cognitive Dissonance?

Chris Piotrowski and Roger W. Guyette, Jr.

College of Business

University of West Florida

Business Education Digest Foundation Issue XVIII, 2011 Page 2

Abstract

Although there are poll data statistics on public attitudes toward the Flat tax, there is a dearth of

research on attitudes of college- level business students toward contemporary tax issues,

including the Flat tax. The current study assessed the attitudes of undergraduate and graduate

business students (N=70) at a regional southern state university. Data were collected using a

form of the semantic differential technique and open-end responses on both the positive and

negative aspects of the Flat tax. Results from the semantic differential measure indicated

equivocal attitudes toward the Flat tax. However, respondents expressed the view that the Flat

tax would be beneficial in terms of simplicity and overall fairness. At the same time, the student

sample felt that a Flat tax initiative would threaten the tax profession and be burdensome for

economically disadvantaged constituents.

Introduction

Tax reform initiatives have been a contentious topic in public discourse and U.S. public policy

for nearly three decades. In the early 1980‘s, President Reagan‘s tax initiatives were widely

heralded as the most significant changes in our nation‘s tax history since World War II. The

consensus of tax experts now claim that President Reagan‘s crowning domestic fiscal policy did

not meet all its aspirational goal, since each succeeding administration has felt the need for

continuing tax legislation (Graetz, 2007). As an outgrowth of public dissatisfaction, various

proposals to drastically reform the U.S. Tax Code have been advanced since the early 1990s. The

major initiatives have focused on what has come to be referred to as the Flat tax and embraced

politically, over the years, by national figures such as Jerry Brown, Steve Forbes, Sam

Brownback, Trent Lott and Dick Armey.

The Flat tax proposed reform, in general, consists of the replacement of existing Federal income

and corporate income taxes by a single marginal rate applied to ―Labor‖ income above a

designated threshold. There is continuing debate about what is considered ―Income‖; i.e., Is

investment income included? According to this model, the cost (and time) in tax filing for

citizens and the cost of tax administration (Internal Revenue Service) for the U.S. Government

would be generally reduced, although corporations, small business, and the self-employed would

need to comply with a more extensive filing procedure.

The Flat tax has its ardent supporters and detractions. Since a Flat tax is associated with the

existence of a progressive income tax, Flat tax proponents argue that it has positive effects on

aggregate capital growth, employment, and overall tax revenues (Forbes, 2006; Ventura, 1999).

Critics claim that Flat tax reform may adversely affect cross-sectional income and wealth

distribution. The specific issue of ―fairness‖ hinges critically on what tax deductions are

abolished under a Flat tax and who profits most from those deductions. In this regard, Ventura

(1999) applied a dynamic general equilibrium model analysis to the Flat tax proposed by Hall

and Rabushka (1995). Results confirmed, in all circumstances analyzed, that distributions of

earnings, income, and particularly wealth become more concentrated under a Flat tax system.

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Highlighted below are the main issues that frame the Flat tax debate:

Proponents claim a Flat tax:

increases tax reporting honesty and compliance

decreases overall administrative and legal recovery costs

is more ―fair‖ than stepped marginal tax rates

removes economic disincentives and encourages economic growth

results to increase in aggregate economic activity that lends to higher personal

income

reduces ―inequality‖ between the rich and poor and, thus, promotes social justice

eliminates ―tax shelter‖ avoidance strategies

eliminates influence of lobbying efforts and groups

eliminates tax ―loopholes‖

Opponents claim that a Flat tax:

favors the wealthy disproportionately since their lifestyle is not impacted by paying

taxes compared to the poor

covers the tax revenue decreases for the rich, since the IRS would place the burden

on the middle-class and poor to make-up the difference

decreases overall government revenue that would result in a decrease of funds for

social programs

results in the loss of tens of thousands of jobs for the tax advising field, IRS

compliance department and auditing professionals

favors ―Investment‖ strategies used disproportionately by the upper-middle class and

wealthy

results in a decrease in job opportunities

becomes more complex and convoluted over time due to the realities of interest

groups and Washington politics

Attitudes and Poll Data regarding Flat Tax Proposals

In the U.S. there is considerable support for replacing the current income tax policy, largely on

the perceptions of the majority of the population that the U.S. tax system is basically unfair. That

is, the belief that taxes are too high and that high-income earners do not pay their fair share of the

overall tax burden. Slemrod (2006) recently reported on survey data from a nationwide poll

sponsored by National Public Radio, the Henry J. Kaiser family foundation, and the Harvard

University Kennedy School of Government. The survey of over 1,300 respondents revealed that

53% favor a flat-rate tax, with 48% indicating the current system is not fair. Furthermore, a

Harris Research Poll found that a sizeable majority (60%) of Americans favor a Flat tax system.

Current Study

More recent poll data on the Flat tax issue seems in order based on two recent developments.

First, there appears to be increased political debate from opposing camps in the general media

Business Education Digest Foundation Issue XVIII, 2011 Page 4

and the academic setting (e.g., Conesa & Krueger, 2006; Forbes, 2005; Gouveia & Oliver, 1996;

Slemord, 2006; Waddell & Burton, 2008). Second, despite some concerns from the political

elite, many eastern European, Asian, and developing nations have embraced Flat tax policies in

recent years (Fuest, Peich, & Schaefer, 2008; Rabushka et al., 2006; Snowdon, 2007); for

example, Bulgaria, Estonia, Russia, Slovakia, Mongolia, Kazakhstan, Ukraine, and Rumania.

Thus, a survey was conducted that assessed the attitudes of university business students

regarding the specific topic of the Flat tax in the Spring of 2008.

Method

Sample

The participants in this study were undergraduate and graduate students from the college of

business at a regional southern university—tax, corporate tax, and MBA students. The proposal

and study design was approved by the Institutional Review Board Review Panel at the

University. A total of 70 students completed the survey form during class time. Participation was

voluntary and the response sheet remained anonymous. The instructor covered the topic of ‗Flat

Tax‘ prior to the administration of the survey form during regular, didactic class instruction.

Instrument

Attitudes are subject to response bias, social desirability, and political persuasion. To overcome

these concerns, it was decided to use a unique semi-projective measurement approach for

assessing views toward the Flat tax. A half century ago, Osgood, Suci, and Tannenbaum (1957)

developed an ingenious and versatile method of measuring the connotative meaning of concepts,

abstract ideas, and attitudes. The instrument is referred to as the ―Semantic Differential‘ (SD)

that combines an associational and scaling procedure. In essence, the SD is comprised of several

bi-polar adjective scales, separated by a 7-point rating interval. The participant (rater) evaluates a

concept (such as Education, War, Freedom, My Job, My Class Instructor) on each of the bipolar

scales. This procedure is ―semi-projective‖ since the rater is not quite sure how the SD functions

or is scored; there is a diminished possibility of response bias and disingenuous responding.

Furthermore, due to the brevity of the instrument, researchers can assess many concepts in a

timely administration. Many factor analytic studies of different concepts, bipolar scales, and

subject populations have reported empirical evidence on the validity, reliability, and utility of the

SD technique (Snider & Osgood, 1969). The Semantic Differential technique has been used

effectively in business research over the years (see Asebrook, 1978; Graeme, 2006; Holt &

Moizer, 1990; Oliver, 1974). Moreover, methodological studies on the SD technique have

supported and corroborated Osgood et al.‘s earlier findings (Piotrowski, 1983).

The semantic differential measure used in this study (SD) was constructed based largely on the

findings of prior SD research, particularly the seminal work of Osgood et al. (1957). The SD

instrument was composed of 14 bipolar adjective scales that reflected the 3 dimensions proposed

by Osgood et al. (Evaluation, Potency and Activity). Since the purpose of the current study was

to assess attitudes and preference (i.e., whether respondents felt positively or negatively toward a

concept), only the SD scales that measured the ‗Evaluation‖ dimension were subjected to data

analysis; specifically – Good-bad, Pleasant-Unpleasant, Fair-Unfair, Friendly-Unfriendly. Each

scale was rated on a 7-point continuum format: the points were given numerical values, from 1 to

Business Education Digest Foundation Issue XVIII, 2011 Page 5

7, with a higher score indicative of a more negative evaluation. The scores from the 4 Evaluation

scales were then summed to produce each respondent‘s Total Evaluation Score (TES).

Results and Discussion

The analysis required a comparison between the group means on the evaluation of the concept

Flat tax. The group theoretical ―Neutral‖ mean was a score of 16, based on the mid-point of the

sample score range (4-28). The data were entered on an Excel spreadsheet program and

subjected to SPSS analysis. A One-sample t-test was conducted utilizing group mean data. The

overall aggregate mean score was 15.37 (N=70) for the summed Evaluation scales on the

semantic differential. This value was not significantly different from the ―mid-point‖ score of 16.

Thus, this sample of business students expressed equivocal views toward the issue of the Flat

tax. That is, as a group, these students held equally positive and negative attitudes toward the

Flat tax initiative; no strong preference, one way or the other was evident.

These results are somewhat similar to poll data showing a slight preference (53%) for the Flat

tax, based on large national samples (e.g., see Slemrod, 2006). Perhaps, the current findings were

tempered by the nature of our sample who may feel threatened by the prospects of a Flat tax in

planning a career as a tax advisor or accountant.

Of interest were the respondents‘ conceptual views on the positive and negative aspects of the

Flat tax. Tables 1 and 2 present these data. Not surprisingly, 33% of the sample think that a Flat

tax would ease and simplify the tax preparation process. Moreover, about 30% felt that a Flat tax

would reflect ‗fairness‘ in the tax system. Many students liked the idea of a standard rate for

everyone, although the issue that a Flat tax would be advantageous to the wealthy and

detrimental to the poor was noted (see Table 2). These business students were cognizant of the

fact that a Flat tax would have macro-economic effects such as loss of revenue for the

Department of Treasury (vis-à-vis, the IRS) and potential to result in overall job loss (Table 2).

As noted earlier, these students understand that a Flat tax would have an onerous effect on the

accounting and tax professions.

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Table 1

Positive Aspects of the Flat Tax Item Frequency

Ease/Simplicity 23 Fairness 20 Standard Rate 9 Eliminates IRS 5 Good for Wealthy 4 No Tax Avoidance (Shelters) 4 Increase in IRS Revenue 3 Good for Middle-class 2 Compliance 2 More Discretionary Income 2 Good for Economic Growth 1

Table 2

Negative Aspects of the Flat Tax

Item Frequency

Bad for the Poor 18 Bad for Tax Profession 12 Loss of IRS Revenue 10 Advantage for Wealthy 8 Loss of Jobs 7 “Unfair” 6 No deductions 2 Usurps 16th Amendment 1 Socialistic 1 Stifles Entrepreneurship 1 Loss of Social Services 1

Note. Respondents listed reasons in an open-response format; thus, Total endorsement value is

greater than 70.

Finally, the student sample felt that a Flat tax proposal potentially would be feasible (yes=36,

52%; no=26, 37%; no opinion=8, 11%), a finding that corroborates prior research (Conesa,

2006). At the same time, many respondents thought that the Flat tax would experience strong

opposition from lobbying groups and backdoor Washington political pressure. Further research

could assess views of other ‗groups‘ such as small business owners who have shown to harbor

negative reactance toward tax burdens imposed on entrepreneurs (see Kirchler, 1999).

Business Education Digest Foundation Issue XVIII, 2011 Page 7

Recommendations for Future Research

Beyond reporting periodic trends in attitudes toward the Flat tax, researchers could advance the

field by focusing on three main issues: (1) gauge the public‘s knowledge on the essential

framework of what constitutes a Flat tax; (2) contrast and assess the public‘s knowledge on

competing types of taxation formats or legislation, and (3) examine how dissemination of

information on the Flat tax varies as a function of media outlet, government-sponsored literature,

college-level teaching, and information obtained from online sources. Moreover, findings from

this line of research should foster academic instruction and lively discussion of tax-related topics

by students in Schools of Business, both in the U.S. and abroad.

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