To the Teacher
On November 2, 2017, Republicans in the House of Representatives unveiled a new tax reform plan. The "Tax Cuts and Jobs Act" dramatically cuts corporate tax rates and would eliminate the estate tax by 2024. The nonpartisan Tax Policy Center estimates that about 80 percent of the bill’s benefits would go to the top 1 percent of Americans.
While tax reform is often in the news, we rarely see a discussion of what taxes do for our society as a whole. Why pay taxes at all? Beyond a legal requirement to file a tax return, taxes allow for provision of public goods for the country and its residents. Federal taxes are spent on programs such as Social Security, Medicaid and Medicare, and other safety net programs such as food assistance for low–income Americans. They also fund military, education, infrastructure, police, environmental and food protections, healthcare,... science, and research. Despite paying taxes each year, many Americans are unaware of how that tax money is spent.
This lesson is divided into two readings. The first reading explores what taxes do and why Americans pay them. The second reading discusses the proposed tax reform plan and how analysts are projecting it will affect the country. Questions for discussion follow each reading.
Reading One:
Why Pay Taxes?
While tax reform is often in the news, we rarely see a discussion of what taxes do for our society as a whole. One might ask, "Why pay taxes at all?"
Beyond a legal requirement to file a tax return, taxes allow for provision of public goods for the county and its residents. Federal taxes are spent on programs such as social security, Medicaid and Medicare, and other safety net programs such as food assistance for low–income Americans. They also fund military, education, infrastructure, food and environmental protections, police, healthcare, science, research, and much more. Despite paying taxes each year, many Americans are unaware of how that tax money is spent.
David Cay Johnston, a veteran investigative journalist specializing in economics and taxes, wrote in the introduction to the book 10 Excellent Reasons Not to Hate Taxes about some of the benefits taxes provide Americans: "For starters, taxes buy us freedom. They buy us civilization. They buy us prosperity. They finance America... We need a tax system designed to grease the wheels of economic growth, reward good behavior, encourage prosperity, succor the poor and give them the tools to succeed, educate new generations of Americans, and perpetuate what we have built, not just in the physical world, but in the realm of ideals."
Stephanie Greenwood, editor of 10 Excellent Reasons Not to Hate Taxes, writes:
Any thoughtful debate about taxes raises two questions: (1) What kind of society do we want? And (2) How are we going to pay for it? These questions are not neutral. They involve deeply held beliefs and zero–sum conflicts over the public resources that support the foundation of decent private lives.
These include: a relatively stable, secure environment, legal protections and recourse for violations of fundamental rights, institutions that allow some measure of opportunity and mobility, and responsive government representation. Decisions about how to allocate these resources call up tension between individual self–interest (how do I and my family benefit?) and collective self–interest (how can we fund a system that serves our social need and remains roughly compatible with our normative ideals?)
While few would argue that we should pay no taxes, those on the right believe that taxes should be dramatically lowered. Many conservatives are ideologically opposed to what they call "big government" and believe that lowering taxes is the best way to check the scope of the federal government.
Some on the right maintain that by cutting corporate taxes, employers will have more money available to raise wages, which have been stagnated in the U.S. for many years. Some argue that providing tax cuts to the wealthy results in greater investment that leads to economic growth.
However, evidence of a connection between tax cuts and economic growth is not strong, as Bruce Bartlett, a domestic policy adviser to President Ronald Reagan, a conservative Republican, argues: "Today, Republicans extol the virtues of lowering marginal tax rates, citing as their model the Tax Reform Act of 1986, which lowered the top individual income tax rate to just 28 percent from 50 percent, and the corporate tax rate to 34 percent from 46 percent. What follows, they say, would be an economic boon...But there is no evidence showing a boost in growth from the 1986 act...Strenuous efforts by economists to find any growth effect from the 1986 act have failed to find much."
Although politicians who rail against taxes would have you believe that Americans are overtaxed, in comparison to other similar countries, the United States has a particularly low tax rate. A 2014 study by the Federal Reserve Bank of Chicago found that the U.S. has a tax burden—a measurement that includes income, property, and other taxes—of 25%, as compared to an average of 34% among the developed countries in the OECD (Organization for Economic Cooperation and Development). In fact, the U.S. ranks 32nd out of 35 OECD countries in terms of overall tax burden. In many other countries with higher tax rates, the revenue from taxes funds generous parental leave, universal early child care, pension programs, free education through university, and comprehensive healthcare, forming a robust public safety net.
Taxes touch many Americans personally when they are required to pay them, but they also have enormous influence on how many receive basic social services, education, and how research is funded. While funding many goods and services that touch our lives, they also operate on a societal level, requiring all of us to engage in the question of what, exactly, is the best use of our collective money.
For Discussion
- How much of the material in this reading was new to you, and how much was already familiar? Do you have any questions about what you read?
- Beyond legal obligation, what is the argument for why we should pay taxes? Which reasons stand out to you as particularly important?
- Were you surprised to read that, in comparison to other countries with similar economies, Americans as a whole, have a relatively low tax burden? If debates about taxes are often about values, what do you think a low tax burden might say about our values?
- If you could change something about taxes in America, what would you change? Why?
- Some taxpayers object to the fact that a large percentage of federal spending goes to the military and supports foreign interventions such as the wars in Iraq and Afghanistan. Some "tax resisters" refuse to pay all or part of their federal taxes for this reason. What do you think of their stance? Why?
- Other taxpayers object to paying for healthcare and support for the elderly and disabled. What do you think? Why?
Reading Two:
The Republicans’ Tax Plan
Since early in his campaign, then–candidate Donald Trump has promised to reform taxes in the United States. In September 2015, he told CBS News, "We’re going to be reducing taxes for the middle class." When President Trump unveiled his new tax reform framework on September 28, 2017, he claiming that "It's not good for me, believe me," in an effort to emphasize that his new tax structure will not benefit the rich.
On November 2, 2017, Republicans in the House of Representatives unveiled a new tax reform plan that is mostly aligned with the Trump framework. The 429–page "Tax Cuts and Jobs Act" dramatically cuts corporate tax rates and would eliminate the estate tax by 2024, allowing wealthy families to pass on their estates and trust funds to their heirs tax–free. Those cuts will be paid for by $1.5 trillion of deficit–spending over the next 10 years.
The nonpartisan Tax Policy Center estimates that about 80 percent of the bill’s benefits would go to the top 1 percent of Americans. According to the Center, the plan would cut middle–class families’ tax bills by $660 next year, while the top 0.1 percent of Americans would receive a tax cut of $722,000. Republican defenders of the bill say that the average family would get a $1,182 tax cut.
The current tax code in the United States is what is known as a progressive tax system, meaning that taxpayers contribute taxes based on their ability to pay. Higher income earners pay a larger percentage of their income in taxes than lower earners do. The federal government uses tax brackets––a range of incomes used to determine a tax rate––to assign different levels of income earners to different tax rates.
In a September 27, 2017 article in the New York Times, Washington correspondent Binyamin Appelbaum described how President Trump’s tax plan would affect Americans across various income levels:
The tax plan that the Trump administration outlined on Wednesday is a potentially huge windfall for the wealthiest Americans. It would not directly benefit the bottom third of the population. As for the middle class, the benefits appear to be modest.
The administration and its congressional allies are proposing to sharply reduce taxation of business income, primarily benefiting the small share of the population that owns the vast majority of corporate equity. President Trump said on Wednesday that the cuts would increase investment and spur growth, creating broader prosperity. But experts say the upside is limited, not least because the economy is already expanding.
The plan would also benefit Mr. Trump and other affluent Americans by eliminating the estate tax, which affects just a few thousand uber–wealthy families each year, and the alternative minimum tax, a safety net designed to prevent tax avoidance.
The precise impact on Mr. Trump cannot be ascertained because the president refuses to release his tax returns, but the few snippets of returns that have become public show one thing clearly: The alternative minimum tax has been unkind to Mr. Trump. In 2005, it forced him to pay $31 million in additional taxes.
Controversially, the tax plan also eliminates many deductions that exempt taxation on income used to pay certain expenses like those for student loans, medical bills, and electrical vehicle purchases, and it reduces the amounts that can be deducted for financing the purchase of homes.
Overall, the Republican tax plan looks like it would do three things. First, it appears that it would make our tax code less progressive, meaning that instead of asking the very wealthy to pay a greater share, it provides important reductions in what they would have to pay. Second, it would bring less overall revenue to government, which might push the government to cut services in some areas. And third, it would also dramatically increase debt and the additional cost of paying for that increased debt.
For Discussion
- How much of the material in this reading was new to you, and how much was already familiar? Do you have any questions about what you read?
- What is meant by "progressive taxation"? What makes the U.S. tax code "progressive"? How would taxes be changed to become more or less progressive?
- What are some of the changes Republicans are proposing to make to the U.S. tax code? What might be some of the costs or benefits of these proposals?
- President Trump has argued that his new tax code will ease a burden on middle–income earners. Based on the reading above or anything else you have read, do you think that argument is accurate? Why, or why not?
–– Research assistance provided by Ryan Leitner