Is America Financially Illiterate? The Numbers Are Alarming

Most Americans don't understand how the tax code works, and it's costing them. In this episode of The Deduction, host Kyle Hulehan sits down with Zoe Callaway, VP of Education at Tax Foundation, to talk about tax and financial literacy in America. They dig into the results of Tax Foundation's national survey on tax literacy, the most stubborn misconceptions people have about taxes (including one that nearly made a teacher turn down her own promotion), and what's happening in high school classrooms across the country. They also connect everyday tax confusion to bigger policy questions, from tariffs to tax refunds.

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Transcript

Zoe 0:00

Um, I have a friend who's a teacher in a high school. She teaches AP Calc. Granted, a very, you know, smart individual texted me the day we were starting the video about a promotion and it did bump her from 12% bracket to her top bracket being 22%. And she did think she was losing money and the spiral. instantaneous in the text messages they were rolling in. How can they do this to me? I'm gonna lose all this money. I'm gonna have to get a different job and change schools. I love the school I work at. What if I have to move because of this? I was like, wow. Take a breath. That is not how that works. You're not losing money. Please take your

Kyle 0:39

Hello and welcome to the Deduction a Tax Foundation podcast. I'm your host, Kyle Houlahan, and we're back today with another episode. And we are joined by Zoe Callaway, who is the Vice President of Education here at Tax Foundation for tax edu. So we are approaching the end of April, which is kind of crazy. 2026 is rushing along a little too fast for me personally, um, but I wanted to bring attention to the fact that it is Financial Literacy month. Um, Zoe, are you doing today?

Zoe 1:06

I am doing great, Kyle, how are you?

Kyle 1:08

I am doing pretty good. I'm doing pretty good. Other than, like I said, things rushing along a little too fast in 2026. I can't believe it's about to be May. Um, and maybe that's just'cause I'm getting old. This is like the passage of time I feel like is just something you talk about when you're old. But, um, with April being financial literacy month, um, where does tax literacy fit into. The bigger picture, and know that we did a poll and maybe you could explain that a bit to people. Um, and could you reveal how much people actually understand about the tax code?

Zoe 1:39

So not great, which I'm sure is not a surprise to anyone listening. So in our 2024 national survey on tax literacy and perceptions of the tax code, we found that more than half of US taxpayers, regardless of age, education level, um, income level, political affiliation. Didn't understand basic tax concepts related to tax filing, and this is really top of mind as tax filing season. Also just wrapped up talking about a busy time for work. Um, but yeah, there's a lot to be done here. So this really spans the gamut and it can completely change someone's life if they misunderstand, um, the tax code and how it applies to their personal finances.

Kyle 2:21

Yeah. And so with the tax code constantly changing, and you know, here at our organization we have entire teams kind of dedicated to tracking it. Um, state and federal, uh, you know, how's the average person supposed to keep up?

Zoe 2:36

That's a tricky question, Kyle, because if we are spending all of our working hours trying to keep up as an organization, there's really not much hope for someone else whose usual full-time job is as a teacher, as you know, a lawmaker, as a business owner. It's, you know, its own organizational endeavor to understand what already exists and then to keep up with what's changing on top of that.'cause as we know, nothing gets repealed, they just stack everything on top of it. So it only becomes more complicated as things change. And so as people are going through it, I try to not. Discourage anyone when we, you know, are teaching them about taxes and say it's worth understanding what you can, it might be a little bit frustrating when you feel like you've caught up and something else changes. Um, but that there are resources out there like the ones from Tax Foundation, um, where if you have the opportunity to pay attention to what's going on around you and stay educated as things change, you're gonna be far better off than half of American taxpayers.

Kyle 3:36

Yeah. And could you provide maybe some more understanding on the poll and kind of break it down a little bit and some, maybe some of the interesting nuggets or facts that you, you found with this poll?

Zoe 3:45

Yeah, so the one that stood out the most to me is the misunderstanding of how tax brackets work because. If you have a job, you're being taxed and at the federal level, you're definitely having a graduated rate, you know, system applied to your income where you have tax brackets. Um, most states have this system as well, so you're coming in contact with it. When you're looking at your paycheck, those rates are being applied and your take home income. However, so many people. Um, most respondents didn't understand how they worked. Uh, you know, you come in contact with people that think you're in the 22% bracket, then your income is all taxed at 22%. And so that throws off your budget. You might forego a promotion or a new job opportunity if you. Think you're being bumped from 12% to 22% and wow, now my taxes have increased by 10% and I'm losing money. But at the end of the day, that's just not how that works. And so I think with something like that, where it's so common in all of our lives, even though I think normal people probably don't think about tax brackets as much as we do, um,

Kyle 4:53

not.

Zoe 4:53

Simply, no, I hope not as well. It would be, uh, interesting to see a world where people were more fascinated by taxes instead of angry about them. Uh, maybe one day we're successful in our endeavors at tax foundation. Yeah, we're trying hard here, Um, the impact from not understanding it is so great that it really surprises me that so many people have this basic misunderstanding and how that can impact them. If I can, I'd love to share this, my favorite story to tell when we talk to teachers about, um, just how serious this is. Um. On the day that we made our fantastic tax brackets video. So if you're listening to this and you're looking for a way to educate people in your life, I recommend you check that out. I have a friend who's a teacher in a high school. She teaches AP Calc. Granted, a very, you know, smart individual texted me the day we were starting the video about a promotion and it did bump her from 12% bracket to her top bracket being 22%. And she did think she was losing money and the spiral. instantaneous in the text messages they were rolling in. How can they do this to me? I'm gonna lose all this money. I'm gonna have to get a different job and change schools. I love the school I work at. What if I have to move because of this? I was like, wow. Take a breath. That is not how that works. You're not losing money. Please take your promotion that you earned and deserve. is how tax brackets really work. And we'll have a video that will explain it to you a little bit better coming out soon. And she was like, wow, thank you. Because she really was like losing it in that moment about how could things work this way. But at the end of the day, the truth is that they don't.

Kyle 6:34

Yeah, and I, I think that's something it's like, I understand why people don't understand it because like, it's not something you spend a lot of time thinking about if you're an average person, but. At the end of the day, it's pretty simple and like, it's like, no, you can take the money. Like if you're gonna get, it's only this small percentage of your income that's gonna be taxed 22% or whatever, it's like, it's okay. You're gonna still be making more money, don't worry about it. Um, and I think like, uh, that's so interesting and you know, you're bringing up. Teachers now, so I mean, I, I'll, I'll dive into this, which is, know, what have you heard from teachers at different conferences that you've been at about how they're handling tax topics in the classroom and maybe where some of those things are going wrong?

Zoe 7:18

So there's currently a national financial literacy movement where 30 states now have wonderfully implemented graduation requirements, um, to have personal finance as a course in high schools, is fantastic. I mean, you and I have talked about this before about how we wish that we had received this education when we were in. Goal and didn't. But kids these days are being far better prepared for their personal finances. However, when we talk to teachers who are teaching these courses, um, the general takeaway is that. The tax portion of it is too daunting many different ways. They don't understand it themselves. Um, they don't know how to get students engaged with talking about taxes or to make them care about it in order to connect with them to teach the lesson. Uh, they don't know how to include it or where to start. And we hear a lot of them are starting. I mean, starting with tax education, with putting a W2 down in front of their students, and luckily we've been able to step in and say, Hey, your students don't know what taxes fund, why they pay them the levels of taxes, what withholding is even so when they see it on the W2, they're not going to know what it means. I think it's a great activity for student engagement, but I think a big problem here is everyone wants to dive right in, right? But that kind of leads to perpetuating these misunderstandings and misconceptions if you're not taking the time to teach the basics. So we're trying to work on that when we engage with them. And then the simple fact too of the teachers don't know this themselves. Um, at our first conference that we went to with our partner, the National Jumpstart Coalition for Financial Literacy, I had met a personal finance teacher who had been teaching. ROTC students for 20 years, and we started talking about our offerings and I told him about the Brackets video and he shared that he didn't know that that's how Brackets worked and had been teaching them incorrectly for 20 years. So it's not just that students don't know, the teachers don't know either, and then they're responsible for this information that they don't understand themselves.

Kyle 9:27

Yeah, that is, uh, far below ideal. That's a lot of students honestly learning, uh, something that's, that's not correct. And I, I think like, and that's how these misconceptions spread, quite honestly. Um, and I think it, it's whatever. We'll cut that out. I just lost my train of thought. I was gonna go somewhere that, but no longer. Anyway, I'll transition to the other question. That is, um, very interesting. That's a, a long time reteaching students, something, um, that is wrong. what are of those biggest tax misconceptions that you keep running into, and why do you think they're really hard to shake?

Zoe 10:03

So a big one with students, and this comes from the financial influencers that we're seeing pop up on social media these days, is that you don't have to pay your income tax. Um, that there's no law requiring this. And there are ways around it, and that's pretty bad misinformation, right? Like the government is going to find out that you did not pay your taxes and they will get their money from you. And also at the end of the day. Legally they are allowed to levy the income tax on you. It was ratified in the Constitution and the 16th Amendment, it's in law. They're allowed to do it. They're allowed to collect it, and you do have to pay it. So while taxes are very complicated and frustrating to deal with, they're also inevitable. And you know, you can try to make arguments that they're not. But at the end of the day, you do have to pay your taxes. So that's a really big one that we want students to understand. Again, that basic level of please pay your taxes. And then when you are taking that effort to pay your taxes, make sure that you understand what you're doing. So the other one's tied to that, again, how tax brackets truly apply to your income. Um, the difference in value between a tax credit and a tax deduction is a big one as well. Um, at a lot of people because. They don't look into the definitions, they just say, I'm saving money on my taxes. Right? Like, it's a way to, you know, save a little coin. Um, and they just pick one or the other without understanding how they work. And so whereas you could have the choice between a hundred dollars tax credit or a hundred dollars tax deduction, the credit is going to be more valuable to you than the deduction. And there was. Actually a case with this, um, in higher ed where they had offered to, to students and everyone was taking the higher value tax deduction over the credit, thinking that dollar amount means I'm saving more money. And it was such a widespread thing of this misunderstanding that they actually repealed of offering the deduction because people were not taking the option that saved them more money. So this plays, you know. A big role in a lot of ways. It starts young. You get your first paycheck and you know, where's all my money going? You know, that's taxes.

Kyle 12:09

I think honestly for you and I being a little younger and like, uh. I've been talking about this for years on the podcast, so no one will be surprised to hear me talk about this, but like, yeah, I didn't know anything about my 401k or what I was supposed to do. I mean, our producer, Dan, I remember messaging like my first year here, messaging my producer Dan. I'm like, what am I supposed to do with all of this? I don't even reme like I, I don't even know what you said Dan, but it was probably good advice, but. I truly, I was just like, I have no idea what I'm supposed to do. Nobody's ever talked about this. Um, so I, I think that's one of those things where you need a little bit of help, and that's why it needs to be in the classroom.

Zoe 12:43

absolutely. And it needs to be in the classroom accurately. I do wanna clarify, we don't want anyone teaching something wrong for 20 years going forward.

Kyle 12:51

And so, you know, we've seen some of these things play out, I think as we're talking about with personal finances as well. Um, and around the recent conversation around tariffs, you know, what do you think maybe that tells us about where tax literacy really stands in the country?

Zoe 13:07

So in a recent poll that we did, um, as part of a broader economic survey around perceptions and understandings of tariffs among average Americans, uh, we asked two questions. The first being the burden of tariffs falls mainly on consumers where you could strongly disagree all the way through. Strongly agree, and across all respondents. Um. It did lean towards most people disagreeing, but that's not how tariffs work in the economy and practice. So the burden of tariffs do mainly fall on domestic consumers. So we do see that this misunderstanding of taxes at the basic level translates into real world tax policy. It's beyond personal finance. It goes into other areas as well. And then our second question was. Tariffs are a stable and efficient way to generate tax revenue. And across the board there, we really had a split between people clearly just not really understanding that some disagreed, some agreed. At the end of the day, they're not a stable and efficient way to generate revenue. At tf if you've ever seen us post something about tariffs online, you have. Post the very simple tariffs or taxes, uh, to be clear, because that's how we want people to think of them, right? They are an invisible tax on domestic consumers. But when you see other things that have been coming out around this issue, even from, you know, elected officials, they love to show a graph of the increase in tariff revenue and how great and wonderful this is. People look at it and I think that they're not realizing that that revenue is additional tax revenue. Would you be that excited if you had that much more money taken out of your paycheck or if your sales tax, you know, if it was a state level policy increased enough to generate that much revenue, you might say, I don't really like how that feels. I'm being taxed pretty heavily I think it's important to understand these things because things are happening rapidly around us. Tariffs are just one of the things that's going on with the tax code at the federal level and having this misunderstanding, you know, it changes things. And when we're thinking about inflation and purchasing power in the economy and bring it back to personal finance, if you. Don't think the tariffs are attacks on you as a domestic consumer. Um, you might not be as readily able to pinpoint the impact that it's having on your purchasing power.

Kyle 15:19

I wanna remind listeners of a story I told on a tariff episode, which is I bought, converse from Japan and had them shipped over. hear. That's a whole long story that we can get into another day. They're made better in Japan. It's fine. don't need to keep talking about it, but I had to pay$70 on top of what I already paid for the shoes, which was like one 50 and eBay, which is where I got them from. Let me know that that was, that's$70. In addition, was going to pay the tariff. They fronted the cost and then I refunded them. I. Paid the$70 tariff that was on these shoes. So I paid it. Nobody else paid it. I did. So that's how this is working and that's how tariffs work. You pay for it.

Zoe 16:02

Yeah, exactly. I remember in the height of, you know, the flurry of tariffs going on, um, I fortunately or unfortunately live across the street from a target and what I noticed going on little shopping sprees here, and there was eventually the price part of the tag was no longer on the close and. Luckily for me, because I do work in this area, clicked immediately. Oh, that's because of the rapidly changing prices due to the tariff policies. Like they can't go through the whole store and stick new prices on everything, but they can easily change it in their system. And so for a little bit, I saw it at Target. I saw it at Macy's. They just were taking prices off of price tags, and that was also due to tariffs. That's a tax impact that you might not realize in the moment is something that's happening because of the tax code.

Kyle 16:49

I. And so, and this goes to show I think, how taxes impact our lives and, and how this misunderstanding matters and, and the importance of this. Um, real quick, before we sign off, Zoey, is there anything right now that you wanna plug that you're working on, or anything happening right now that you wanna let people know about?

Zoe 17:04

Definitely in the nature of talking about misconceptions around taxes and things we see in the media. Another big one earlier this year was about these great refunds that everyone was gonna get this filing season. Um, so we did just recently release an educational explainer video on how tax refunds. Work and what they mean and how you receive one. And so I encourage people to check that out because a lot of the, uh, rhetoric around these refunds was, oh, there's this big tax cut and you're getting big refunds and isn't this so great? And that was only a piece of the puzzle. The other half that really resulted in the refunds was the not adjusting the withholding tables to match. And so people were over withholding. Um, and in personal finance, that is the one tax thing that you will see people, you know. Confidently cover in personal finance courses is don't celebrate a tax refund. You're giving an interest free loan to the government all year. So from the financial planning side, you know, expecting a refund or owing every year, you do have control over that. You can update your withholding with your employer and kind of tweak that to where you want it to be and have more of an active, rather than a passive role in your tax filing. And if you. We'll expect, you know, a check at the end or if you're going to remit money to the government, but it's not super simple. I will throw in, if that sounded really exciting and you're gonna go and tear into your withholding and get it down to zero, that's probably impossible. Our head of our federal tax team, Erica York, has shared that she's tried herself and she is the expert in this and she cannot get hers to zero either. So don't get too excited, but you do have some agency over your withholding in your tax

Kyle 18:45

It's hard to do, but there, you don't have to give quite as much away, but, um, Zoe. Thank you for being on the show today. I appreciate you being here and and talking about financial literacy, which is very important, especially now in the month of April. And before we sign off, if you have any burning questions on taxes, you can send them our way. You can drop a comment here on YouTube. You can email us at podcast@taxfoundation.org, and of course, you can slide on to our dms at Deduction Pod on Twitter. you for listening.