Taxes are a central issue in the 2016 presidential campaign. In fact, taxation almost always is an important issue in national elections because:
a) Taxation is one big way that we (through our government) divide up the country’s wealth.
b) Taxes pay for all the services we depend on, including schools, healthcare, public transportation, libraries, clean air and water, job programs, housing and food for the needy, support for the elderly and disabled, police and fire protection, etc. They also pay for infrastructure (roads, bridges, water supply, etc.), and for the U.S. military program.
c) Nobody likes to pay taxes.
Taxes are hard to understand sometimes. The tax formulas are sometimes complex and the vocabulary is often unfamiliar. Politicians have been known to be less than clear in explaining their tax plans so that they can avoid alienating voters—especially those who are disadvantaged by those plans.
Here are some of the common terms that the candidates use to describe their tax proposals.
Income taxes. Individuals pay income taxes as a percentage of their wages, investments, money from retirement accounts and other sources. Under our current income tax system, people with higher incomes usually pay a higher percentage of their income in taxes than those with lower incomes. (The top federal income tax rate, for those earning over $415,000 per year, is 39.6%; the bottom rate, for those earning under $9,275, is 10%.) This is called a "progressive" rather than "regressive" tax policy.
Flat tax. This means that everyone pays the same tax rate, whether you are a corporate CEO or a bus driver.
Capital gains. When you invest money (in the stock market, for example) the money you make when the stock is sold is taxed. Much of the income gained by the wealthiest Americans each year is considered "capital gains." The top tax on long-term capital gains is much lower than the top income tax rate (20% vs. 39.6%).
Payroll tax. These taxes are paid as a percentage of your paycheck (usually half is paid by the employer and half by the employee). This includes our contributions to Social Security (the U.S.’s retirement system) and to Medicare, which provides healthcare for the elderly and disabled.
Consumption tax. Rather than being taxed on how much they earn, people (and corporations) are taxed on how much they spend. Though we are all familiar with the state sales tax we pay when we buy a new toaster, people have proposed many other kinds of consumption taxes. Since wealthy and low- income people are generally subject to the same consumption taxes, they tend to be regressive. Some consumption taxes are called "sin taxes" because they are intended to discourage an unhealthy behavior - like the high taxes people pay to buy cigarettes.
Value Added Tax (VAT). The VAT is similar to a sales tax, except it is paid in stages. Every time value is added to a product (eg, it is further refined or processed), that added value is taxed.
Corporate income tax. Corporate taxes are even more complicated than individual taxes, but candidates often offer a specific maximum rate. The maximum is seldom reached because industry lobbyists are so successful in persuading legislators to insert loopholes that offset some portion of the tax.
Effective tax rate. This is the actual tax rate after a company or individual takes advantage of all deductions, credits, exemptions, etc., that lower their taxes.
1. From the 1950s to 1963, the highest tax rate for the wealthiest couples was 91%. What is the highest rate today?
e) Couples do not pay income tax.
2. True or False
Sales taxes make wealthy people pay more because they buy more.
Answer: This is a trick question. People with a lot of money do pay more dollars in sales taxes (since they almost always buy more). But the taxes they pay make up a much smaller portion of their money. Lower-income people do not have much extra money to save or invest, so they pay sales taxes on virtually all their income.
3. Who said "The hardest thing in the world to understand is the income tax"?
a) Marco Rubio
b) Bernie Sanders
c) Barack Obama
d) Joe the Plumber
e) Albert Einstein
Answer: Albert Einstein
Where the candidates stand
Divide the class into five groups and have each group sit together in one part of the room.
Print out the summaries of candidates’ tax proposals below, and cut the page so that each candidate is on a separate slip of paper.
Give one slip to each group. Then give the groups 5 minutes to read about "their" candidate’s tax proposal. Ask groups to discuss among themselves:
- What is this proposal?
- What impact would it have? How would it affect low-income people? How would it affect the wealthy?
- What questions do you have about it?
Reconvene the class and ask each group to read the information about their candidates’ tax plan, and to share their thoughts and questions about the proposal.
SENATOR MARK RUBIO (R)
Sen. Rubio would replace the income tax with a consumption tax. (Some 46% of federal revenues currently come from income taxes.) Under Rubio’s plan, we could save or invest as much money as we want without being taxed, and only pay a tax on it when we spend it. His plan would retain some of the present tax credits for such items as house mortgages, college tuition and having children.
According to the Tax Policy Center, Rubio's plan would lower taxes for everyone (averaging $3,150). Wealthier people would see their taxes cut much more than the average. Those making $3.7 million would see a tax cut of $900,000.
FORMER SECRETARY OF STATE HILLARY CLINTON (D)
Hillary Clinton has suggested various changes that would raise more money from the wealthiest individuals. This would include:
- a 4% surcharge on incomes over $5 million
- applying the "Buffett Rule" to ensure that the wealthiest pay at least a 30% income tax. (Warren Buffett is a billionaire who famously reported that his secretary pays a higher rate of taxes than he does.)
- raising capital gains taxes
DONALD TRUMP (R)
Trump's plan would simply cut taxes for everyone—individuals and businesses. Like Rubio's plan, the wealthiest would receive the largest cuts. While the average tax cut would be $5,100, those making over $3.7 million per year would see their taxes decrease by $1.3 million. Individuals earning $25,000 or less (couples, $50,000) would pay no taxes.
Trump’s plan also reduces the corporate tax rate from 35% to 15% and closes some of the tax loopholes.
SENATOR TED CRUZ (R)
Cruz proposes to eliminate taxes on corporations, payroll taxes, and estate taxes. All individuals would pay the same rate of income tax—10% . Corporations would pay a new 16% Value Added Tax.
Cruz's plan would cut taxes an average of $6,100 for individuals. But those earning higher incomes would see a much bigger tax cut. Those earning over $3.7 million would get a tax cut averaging $2 million.
SENATOR BERNIE SANDERS (D)
Sen. Sanders’ plan raises taxes on the very wealthy by:
- raising the tax rates and limiting tax deductions for all those earning $250,000 or more per year
- taxing capital gains at the same rate as income from work.
- Sanders also proposes to create a national health insurance system that would make healthcare free at the point of delivery (that is, people wouldn’t have to pay co-pays or other fees to insurance companies). It would be financed through a payroll tax of 2.2% on individuals and 6.2% on employers.
Republicans vs. Democrats
Ask students what the Republican proposals have in common. Elicit or explain the following.
In general Republican candidates:
- favor policies that reduce overall taxes and give much higher tax breaks to those making more money.
- believe in smaller government. Their tax plans reduce the federal budget by $7-9 trillion dollars over the next decade.
- believe that money will "trickle down" from the wealthy to those below. The idea is that if the "job creators" are taxed less, they will be able to create more jobs—benefitting everyone. The reduced federal budget is also seen as a political benefit.
What do the Democrats’ proposals have in common? Elicit or explain the following.
In general Democratic candidates:
- favor increasing taxes on the wealthy
- favor more federal spending (for infrastructure, education and healthcare, for example) and would raise taxes on the wealthy to pay for it.
- see government as a tool to fix the economic imbalances that have produced vast inequalities in wealth and income. Both Clinton and Sanders would create jobs with large spending on infrastructure. Sanders' proposals would also establish a new national health insurance system and would provide free public higher education for all Americans.
1. Can taxes ever be "neutral" or does tax policy necessarily favor some portion of the population?
2. The gap between the wealthiest 1% of Americans and the remaining 99% has increased tremendously in the last few decades. Should tax policy be used to close the gap?
3. How important is a candidate's tax policy in deciding who to vote for in a presidential election (or primary)?