The individual income tax is the single largest source of revenue for the United
States. This important tax is imposed on the wages, salaries, investments, and other
types of income that an individual or household earns. Since its founding in 1913 with
the ratification of the Sixteenth Amendment, the individual income tax has been a crucial
means of funding public spending. While the federal government funds public spending
through several different types of taxes, data from 2020 indicated that the individual
income tax made up 41.1% of the country’s total revenues. The share of total revenues
that the individual income tax makes up in the United States is almost double that of the
corresponding average Organization for Economic Co-operation and Development
(OECD) country measure.
The U.S. individual income tax system relies on the concept of voluntary
compliance to function properly. Voluntary compliance represents the idea that a
country’s citizens will cooperate with their government’s tax system by filing honest and
accurate returns each year. In other words, taxpayers must pay their taxes without any
proactive action by the federal government. Voluntary compliance is beneficial, in
theory, because it allows the U.S. individual income tax system to operate with lesser enforcement action and subsequent costs. However, the reality is that it creates a tax
system that many citizens find confusing and challenging to navigate.
The tax gap faced by the United States exhibits the shortcomings of a tax system
reliant on voluntary compliance. The tax gap is a measure that represents the difference
between taxes owed and those that are paid. The most recent official U.S. gross tax gap
estimates that hundreds of billions of dollars of individual income tax are not being
paid. This large tax gap amount illustrates that voluntary compliance may not work as
well, which leads to subsequent fairness challenges for the system and its taxpayers.
This Comment explores how the United States can alleviate the issue presented by
a large tax gap amount by drawing upon lessons learned by the Nordic countries of
Sweden, Norway, Denmark, Finland, and Iceland to increase taxpayer buy-in. The
Nordic model employed in these countries includes higher levels of taxation coupled
with a strong sense held by citizens that the government uses their tax dollars
efficiently. Because citizens of these Nordic countries are more inclined to voluntarily
pay their taxes, the government can, in turn, dedicate less of its resources to ensuring
compliance. On the other hand, Americans do not have the same trust in their tax
system. To increase taxpayer buy-in and allow its individual income tax system to
function more like those seen in the Nordic countries, the United States must change
public perception regarding tax fairness. The United States should do this by
implementing participatory budgeting, a process that allows citizens to provide their
input on how public dollars are spent.