Here’s a challenge: Try to find a serious discussion of our nation’s tax policies in the curriculum of any liberal arts college or university. Good luck! The subject rarely earns more than minor attention even in economics courses. And it’s virtually absent from our high schools.
No one should be surprised. Consider this anecdote. In the late 1990s, I met with Arthur Schlesinger, Jr. to see if he would write a blurb for my forthcoming book, If Americans Really Understood the Income Tax. A favorite professor of mine when I was a Harvard undergraduate decades earlier, Schlesinger remained one of our country’s most distinguished U.S. historians. His initial comment: “But John, I know nothing about taxation.”
One reason: Never having been taught about our tax laws, let alone tax policy issues, professors as well as high school teachers have little idea what to teach and how to teach it. So they ignore what deserves to be part of a basic civics education.
With troubling implications: Taxation must have little bearing on our nation’s history or its future–on our social history, including issues of race, class, gender and poverty; on our nation’s economic growth; on our government’s ability to pay its debts and fund essential programs. At a minimum, students could well assume that the subject is beyond them, either because it’s inherently within the purview only of tax experts or because “my brain doesn’t do numbers.”
Here’s a different perspective. Except for the U.S. Constitution, federal tax laws represent the most comprehensive expression of our nation’s values. The laws touch upon nearly every aspect of our lives—housing, health care, education, jobs, unemployment, entitlements, marriage, divorce, children and childcare, retirement, charities and charitable giving, the environment, and on and on. The tax choices Congress makes crucially shape who we are as a nation and what we will become. Our young people need to know this.
Put differently, a public illiterate about our government’s tax policies is vulnerable to countless misleading statements about them. This is dangerous. We can’t afford it.
The case for introducing the subject to a college or high school curriculum is particularly timely now given the need for genuine reform of our nation’s dysfunctional income tax, and the vast divide between the parties about what such reform should mean. There is widespread agreement that a simpler tax system could be both fairer and promote greater economic growth. Rhetoric aside, we remain mired in a clash of two shouting matches: Taxes must not be raised on anyone—indeed, they already are too high, particularly on “the rich,” according to most Republicans–or taxes must be reduced on “the middle class” and raised only on “the rich,” the view of most Democrats, including President Obama.
Both arguments share one characteristic: They are data free. The public hears only conclusions, as if either argument is self-evident. Here’s what’s not self-evident: However “middle class” or “rich” is defined—and the choices seem unlimited– the tax liabilities of households within each category depend on far more than the size of their income. With well over 100 tax breaks protecting nearly half of all individual income from tax—nearly $7 trillion of untaxed income last year alone—households of equal size and equal incomes seldom owe equal taxes. Rather, the amount we owe depends far too much on our ability to avoid taxes than on our ability to pay them, whether we are middle class or rich.
Probably to your great surprise, all this can be understood by high school juniors and seniors in an hour.
My confidence stems from experience. For 25 years I taught a seminar for liberal arts students at Mount Holyoke College on the social and economic outcomes of our tax laws. And for the last year and a half, I have given numerous one-hour talks on the subject to high school juniors and seniors studying economics, U.S. government, or U.S. history. The teachers value it. The students get it.
But let’s make it a series of five-one hour talks that you—Harvard Law students—can help prepare that will enable college professors and high school teachers to introduce the major tax issues of the day to their students. Consider these topics I have covered in a single hour on the federal individual income tax for high school students:
First: The choice of an income tax vs. some form of consumption tax.
Second: The central revenue-raising role of the individual income tax and the need, therefore, that it be well designed and respected.
Third: The choice of progressive rates—those now and since 1913–vs. a single flat rate.
Fourth: The vast difference between “economic income” and “taxable income” under our tax laws, in which nearly half of all individual income escapes taxation through tax breaks for personal matters, such as for owning a home, buying health insurance, funding a retirement plan.
–Two consequences: (1) Tax rates on the remaining “taxable income” must be much higher than would be true with far fewer tax breaks; and (2) it is unlikely that people with equal abilities to pay will pay equally.
Fifth: Most of the “missing income” from personal tax breaks appear as exclusions, deferrals and deductions (each explained) that save the most taxes for people in the highest marginal tax brackets.
–Still, the top quintile of income earners pay about 90% of all federal individual income taxes, a much higher share of such taxes than their share of all income. (Low- and moderate-income households, while paying little or no federal income taxes, pay substantial Social Security and Medicare taxes, federal, state and local sales taxes, and, in some cases, state income taxes.)
Sixth: My favorite example: The home mortgage interest deduction—the most prized of all tax breaks and a third rail of American politics. Let’s assume it exists to promote homeownership.
–The law: Taxpayers may deduct the interest on up to $1 million of loans to buy, build or substantially improve up to two homes that they use personally.
–The estimated tax savings, and cost to the government, over five years: $400 billion (from Congress’s nonpartisan Joint Committee on Taxation).
–Who gets that $400 billion? (based on 2014 distribution by the Joint Committee)
For the bottom half of all tax returns: 2% ($8 billion);
For the top half of all tax returns: 98% ($392 billion);
For the top 5% of all tax returns: over 40% (over $160 billion).
Then questions and observations:
–Does the deduction significantly increase the percentage of home ownership? Probably not.
–The deduction drives up house prices.
–The deduction may create double losers: those who don’t benefit from the deduction and may pay higher rents if there are fewer rental apartments because so much capital is drawn to homeownership.
–Our economy may be stronger if fewer tax dollars subsidized expensive homes.
Finally, a discussion of possible reforms, such as subsidizing only a single, basic home; tax credits to subsidize the purchase, with the credits declining as incomes rise; lowering tax rates for everyone if these and other reforms significantly increase the amount of taxable income.
Professors and teachers need your help to craft these discussions. My bet is: you’ll enjoy it.
John O. Fox holds degrees from Harvard College, A.B. 1960; University of California at Berkeley Law School, LLB, 1964; Georgetown University, LLM in Taxation, 1968. He has practiced law in Washington, D.C., 1964- 2000; was visiting professor, Mount Holyoke College, 1985-2011; and is the author of If Americans Really Understood the Income Tax (Westview, 2001), op-eds in Washington Post, New York Times and other publications. He can be reached at firstname.lastname@example.org or 760-778-5222 in California, and, after April 2015, at 413-549-2604 in Massachusetts.