Tax Reform & Wealth Inequality

November 1, 2017

Critics say Republican tax proposals will increase economic inequality. This activity has students explore the current state of U.S. wealth inequality through a quiz, reading, an activity and discussion.  

Student Reading
Tax Reform & Wealth Inequality 

In the coming weeks or months, President Trump and Congressional Republicans hope to push through a major tax reform bill that would dramatically cut taxes, especially for corporations and the wealthy, reducing funds that would be available for programs that support middle– and low–income Americans. 

Taxes pay for nearly all government services, from parks and schools to armies and the FBI. When taxes are cut, budgets for things like healthcare, education, and environmental protection are slashed – or else the nation must go into deeper debt (and pay a higher percentage of its tax revenue in interest).

Who pays how much in taxes is a constant tug–of–war in Congress and legislatures around the country.  With so much money at stake, you can understand why thousands of organizations and corporate lobbyists work full time trying to influence tax laws.

On November 2, 2017, Republicans in the House of Representatives unveiled a new tax reform plan. 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. "With this plan, we are making pro–growth reforms, so that yes, America can compete with the rest of the world," said House Speaker Paul Ryan of Wisconsin in announcing the legislation.

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 .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. 

Opponents of Republican tax proposals say that they will widen the already enormous gap between the rich and everyone else. 

This divide isn’t just about how much money people actually earn – it’s about how much wealth people own. In other words,  economic inequality isn’t just about comparing the size of the paychecks people receive. It also involves comparing how much property, stocks, bonds, and other wealth people own or inherit. (Over 60 percent of the richest 400 Americans inherited much of their wealth.) Much of this wealth continually increases in value without any labor being performed. In contrast, people with little wealth almost always have to work very hard to get it.

While people often complain about the tax breaks that wealthy people receive for gambling, business dinners, limousines, and yachts, the biggest tax breaks and loopholes are not as easily understood without an MBA or law degree.

For example:

  • Hedge fund managers making hundreds of millions of dollars pay a 20% tax on that income (instead of 40%) because the income is called "carried interest."
  • As long as assets (like stocks) are not sold, they can keep increasing in value without being taxable. But these assets can be used to get loans to buy more market investments.
  • Wealthy families set up "charities" which include among their expenses, salaries to their children and other financial benefits.
  • Corporate money is often stored in "tax havens." Over 20 trillion dollars worldwide is kept in tax–free (or tax–negligible) countries like the Cayman Islands.

By all measures, the wealthiest Americans have been increasing their own assets at a far greater rate than those lower down on the economic ladder. While there are other economic forces that affect wealth inequality, the way we are taxed and the rates of taxation we pay can increase inequality or reduce it.



Quiz: Test your wealth knowledge

1. Forbes Magazine publishes an annual list of the wealthiest 400 Americans. In 1982 the average wealth of the 400 was $230 million dollars. Guess how much the average was in 2016?

a) Almost exactly the same: $230.8 million dollars

b) $6 billion dollars

c) $165 million dollars

d) $9.8 gazillion dollars

2. True or False

The net worth (what you have minus what you owe) of the bottom 60% of the country decreased  from 2001 to 2011, the most recent year available.

3. True or False

While the top tax rate for income from jobs is around 40%, money earned on the stock market (called capital gains) is taxed at a maximum of 20%.

4. In 2013, the top 20% wealthiest Americans owned what percentage of stocks?

a) 22%

b) 49%

c) 61%

d) 85%

e) 91%

5. Which of the following receive tax breaks from the IRS?

a) second homes

b) yachts with beds

c) companies that ship jobs overseas

d) corporate jets

e) unemployment benefits

6. True or False

Billionaire investor Warren Buffett pays a lower rate of income tax than his office staff.

7.  What is the median wealth for white households in the U.S.? (Median means that half of the people have more, and half have less.)  In a typical household, this might mean the amount the family has already paid toward their house, plus the value of cars and other goods, plus savings, minus the remaining mortgage and other debts.

a) $12,000

b) $36,000

c) $134,000

d) $305,000

e) $1.3 million

8.  What is the median wealth for black households?

a) $11,000

b) $54,000

c) $112,00

d) $254,00

e) $994,000

9. True or false? 

The 400 wealthiest Americans have more wealth than half of all Americans combined

10. How does the U.S. rank (among developed nations) for income inequality?

a) second best

b) second worst

c) square in the middle



1. b 

2. True

3. True

4. e  

5. all except e 

6. True

7. c

8. a

9. True

10. b


Class Exercise

To get wealth out of the realm of abstract numbers, have the class perform the following exercise:

Divide the class into four groups. Each group will represent a different wealth grouping:

a) low income  (people without homes, people receiving government assistance, people with very low wages, etc.)

b) moderate income ("middle class," small business owners, etc.)

c) wealthy (CEOs, highly paid professionals, stock traders, etc.)

d) super wealthy (1%, Forbes List)

Have each group list what assets are likely to be found in households of each group. Examples would include homes (perhaps multiple homes), cars, boats, planes, gold, businesses, computers, bank accounts, stocks, real estate, retirement plans, collections of valuables (art, jewelry, cars) ...

Have each group describe to the rest of the class what assets they are likely to own.

  • What differentiates their group from the group above?



Ask students:

  • What is one fact or idea that stood out for you in this activity?
  • Did the activity make you think differently about the current tax plan – or future tax plans? Why or why not?