The following quotations are from the two major party candidates for the presidency. Can you tell which ones are from Donald Trump and which are from Hillary Clinton?
- "Imagine your paycheck was 40 percent higher than it currently is. What could you do with 40 percent more wealth?
- "I am proposing an across-the-board income tax reduction--especially for middle income Americans."
- "Right now, the wealthy pay too little and the middle class pays too much."
- "The rich will pay their fair share."
- It’s outrageous that multi-millionaires and billionaires are allowed to play by a different set of rules than hardworking families, especially when it comes to paying their fair share of taxes."
- "I want to make sure the wealthy pay their fair share, which they have not been doing. I want the Buffett Rule to be in effect, where millionaires have to pay 30 percent tax rates instead of 10 percent to nothing in some cases."
- "There will be people in the very upper echelons that won't be thrilled with this because we're taking away their deductions."
- "Hardworking middle class families need a raise—not a tax increase."
The candidates' plans
Discuss with students some of the tax proposals advanced by Hillary Clinton and Donald Trump. (Also see this lesson.)
Hillary Clinton has proposed increasing taxes on the wealthy and large corporations to pay for investments (such as helping students pay for college tuition). Her proposals include:
- a 4% surcharge on incomes over $5 million
- ensuring that the wealthiest pay at least a 30% income tax
- closing tax loopholes that reward companies for shifting profits and jobs overseas
- limiting the ability of Wall Street money managers to count their income as "capital gains," which are taxed at a much lower rate
- providing tax relief for people who pay high health care costs or care for an ill or elderly family member
Donald Trump proposes to cut taxes for everyone. Wealthy people would see 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 includes:
- reducing the corporate tax rate from 35% to 15%
- closing some tax loopholes
- eliminating taxpayers' ability to claim deductions for each of their children as well as a "head of household" provision that lowers tax bills for many single parents
- providing a childcare tax credit
Taxes have been a recurring theme in the 2016 presidential campaign. Because wages have largely remained flat (or sometimes even fallen) over the last 50 years, many Americans have looked to tax cuts to help them get by. And politicians have been more than willing to promise tax reductions to get votes. Because nine out of ten Americans identify themselves as "middle class," Clinton and Trump and most other politicians are anxious to aim their statements on taxes at that group of voters.
Taxes are a political issue. Congress makes changes to the tax law each and every year. Every tax provision and every change benefits (or hurts) some taxpayers more than others. Since wealth inequality has become a major national issue, taxes too are being examined as a vehicle to either increase or decrease the enormous (and growing) gap between the super wealthy and the rest of the population. Democratic presidential candidate Bernie Sanders named specific taxes on the wealthy to make college free and to pay for national health insurance.
Let's take a little look at taxes and especially the taxes for those at the top of the economic ladder.
The tax system is enormously complicated. (See this lesson on taxes for more.) People pay property taxes, payroll taxes, excise taxes, user fees, and sales taxes, as well as income taxes at the federal, state and local levels.
For most of us, the federal income tax is the largest tax we pay. Officially, the federal income tax is progressive (or graduated) so that those earning the most pay the largest percentage of their income in taxes. The highest rates and the lowest rates, and the tax "brackets" in between have fluctuated since the tax was made permanent in 1913. From 1940 to the 1960s the highest official tax rate was between 80% and 94%. From the 1960s to 1980 the highest rate was around 70%. Since the 1990s the highest tax rate an individual pays has been between 30% and 40%.
The highest tax rate for any income group is just that - the highest rate. The tax code provides a huge number of credits and exemptions that allow people to reduce their taxes. Those in the lowest income bracket often pay no federal income tax at all. Middle-class taxpayers can usually reduce their taxable income if they:
- support a child or parent
- pay a mortgage on a house
- have very high medical expenses
- give to charities
- pay college tuition
In addition, there are tax credits which directly reduce one's taxes. Those in the middle class can take credits for:
- paying college tuition
- child care
- paying into retirement funds
"You know, I made $46 million last year. It was a bad year for me. But I can still afford to pay more than my secretary, who has a higher tax rate than I do."
-Warren Buffett (the third richest person on the planet according to Forbes Magazine)
Some tax rules help the wealthy disproportionately. The capital gains tax is one example. Income from investing in the stock market is taxed at 15-20%, while income from actually working is taxed at rates up to 40%. About 80% of stocks are owned by the wealthiest 10% of Americans and half of Americans own no stock at all. According to the non-profit group Citizens for Tax Justice, if capital gains were taxed as ordinary income, the U.S. Treasury would gain over $500 billion over the course of a decade.
The New York Times recently revealed that Donald Trump claimed business losses of 915 million dollars in 1995. The tax law allows him to spread out that loss, allowing a billionaire such as Trump to pay no taxes at all for 18 years.
Here are other ways wealthy people reduce their tax payments:
- the deduction for house mortgages can be used for mortgages up to a million dollars for not just for one home but a second home as well. (And for your yacht, if it has sleeping quarters...)
- the use of family "trusts" to avoid gift taxes and estate taxes
- storing money abroad in tax havens
- the ability to manipulate income to maximize lower-taxed compensation (dividends, stock options, etc.) and minimize income taxed at the higher rates
- the ability to max out on allowable retirement savings
- special provisions for financial managers (e.g. hedge fund managers) which allow their salaries to be considered (lower-taxed) capital gains
- setting up a foundation that then pays a salary to the donor or a member of the family
- using a company expense account for fine dining, company car, apartment or private jet. No taxes are paid by the person receiving these services or the business providing them.
The tax code is over 74,000 pages long. It is full of loopholes and hidden special-interest provisions. With so much money at stake, you can understand why corporations and the very wealthy hire very expensive lawyers to maximize their tax savings.
- The top 1% pay about 45% of all federal income tax (about 27% of all federal taxes). Is it fair to require them to pay more in taxes?
- Republican candidates often advocate simplifying the tax code: one flat tax, pay taxes on a postcard, abolish the IRS, etc. Would these proposals make the tax system any fairer?
- When all candidates say they want to help the middle class and the tax proposals are so complicated, how does one evaluate the parties' positions? (News publications/websites? Other media? Thinktanks? Google?...)
- In 2012, candidate Mitt Romney (a multimillionaire) attracted attention when he disclosed that he paid only 14% in income taxes. Donald Trump says he pays the lowest taxes he can because he's "smart." Is it ethical for the super wealthy to take advantage of every tax loophole they can?
- Some countries attempt to slow the concentration of wealth by taxing the wealth itself (instead of just income). Do you agree with this approach?