The Social Meaning of the Tax Cuts and Jobs Act
abstract. This Essay exposes the moral messages implicit in the Tax Cuts and Jobs Act (TCJA). It argues that the legislation reflects values that were not openly debated or discussed in the legislative process, but are crucial to the distributional effects of the law. The TCJA reduces progressivity and increases deficits because it favors traditional families, prefers capital to labor income, treats people as detached from each other, makes charity the narrow concern of the rich, and privileges the acquisition of assets. Fairness in taxation depends on explicitly identifying social values that produce economic justice and purposely designing the law to achieve fairness.
A nation’s tax law reflects its values, and tax reform is an important moment to examine how the tax law defines national priorities. The changes Congress made to the Internal Revenue Code in the 2017 Tax Cuts and Jobs Act (TCJA)1 reveal ideals beyond those Congress explicitly identified and defended in the legislative process. While scholarly discussion of the proposed legislation focused primarily on efficiency concerns,2 a wide range of social policies became embedded in the economic structure the tax law creates. Whether policy makers consciously created social policy based on these values is less important. Identifying these values, though, is crucial, as the resultant policies will affect all Americans in myriad ways.
This Essay discusses five American priorities and values revealed by the TCJA:
1. The traditional family is best;
2. Individuals have greater entitlement to their capital than to their labor;
3. People are autonomous individuals;
4. Charity is for the rich; and
5. Physical things are important.
The TCJA’s distributional effects dovetail with these values. As has been widely reported, the legislation substantially reduces the tax obligation of the most affluent Americans and reduces taxes only slightly and temporarily for the least affluent.3 Reducing the progressivity of the tax system and diminishing total revenue collected is consistent with implementing these five priorities and values. First, traditional families with a single working spouse and a stay-at-home spouse are disproportionately prosperous, so subsidizing that family model reduces progressivity. Second, access to capital increases with affluence, so a greater entitlement to investment income favors taxpayers who enjoy that affluence. Third, valuing individual autonomy is consistent with robust individual property rights, and less consistent with high levels of taxation for shared community purposes. Fourth, favoring the charitable giving of the rich allows them tax reductions not available to others, and sends the message that philanthropy substitutes for tax paid. Fifth, prioritizing physical assets favors individuals are able to invest in such assets and underrates the important value that workers contribute to prosperity.
Critics of the legislation concerned about the law’s reallocation of tax burdens down the income scale4 and its projected budgetary deficits5 must focus more on these embedded priorities. The distributional effects flow from these principles, not vice versa. The ultimate fairness of the tax system depends on deliberately creating a substructure that reflects equality, community, and dignity as core tax policy values. Only after lawmakers engage in this fundamental examination will tax reform lead to distributive justice.
This Essay proceeds by examining how each of these five values is reflected in the TCJA. For some of the provisions discussed, there are well-known efficiency justifications for the legislation. I aim here to emphasize that efficiency is a value. It deserves no definitive influence on policy and is appropriately weighed against other values in assessing proposed legislation. While I disagree with some of the underlying values reflected in the TCJA, this Essay is not intended to convince the reader that particular values are best. Instead, its goal is to reveal the embedded beliefs that did not receive attention in the process of adopting the new law. Only by explicitly considering the social meaning embedded in the tax law will policy makers be able to purposely strive for justice in taxation.
The TCJA made several changes to the way that families are taxed. The tax law has long favored families with two parents, one breadwinner, and children living in the same home; the TCJA further increased the relative benefits to these “traditional” families. The traditional family, in this paradigm, is increasingly affluent and white,6 and the tax law normalizes this paradigm further. The TCJA increases the tax benefits for traditional families by changing the rate structure, stigmatizing head-of-household filing, and modifying the rules concerning tax benefits for children. It also reinforces the norm of the traditional family by changing the tax treatment of alimony payments. After the TCJA, alimony payments are subject to more tax than they were before, making it more expensive for divorcing spouses. The new rule effectively imposes a new tax on divorce. I examine each of these measures below.
The rate structure is somewhat complex in its operation because there are different rate schedules for different types of filers.7 Married people file a single joint return on which they aggregate their income and pay tax on the combined amount. Unmarried individuals file as single taxpayers, or heads of household, depending on whether they have dependent children.8 Every filing status has the same graduated rates, but the “rate breaks” differ.
“Rate breaks” are the dollar amounts where higher marginal rates begin. In a graduated rate system, all taxpayers enjoy the benefit of lower rates on their first dollars of income; their highest rate is only applied to their last dollars earned. A taxpayer’s “marginal rate” is the rate on her last dollars earned (i.e., at the margin). All taxpayers are subject to the same graduated rates, but because the rate breaks differ, single taxpayers start to pay tax at higher rates at lower income levels than do married taxpayers. For example, in 2018, single individuals begin paying tax at 22% on earnings in excess of $38,700, while married filers pay tax at 22% on earnings in excess of $77,400.9 The breaks are lowest for single people, higher for heads of household, and highest for married taxpayers filing jointly.10 Because married couples file jointly, the law effectively splits their total income between them. But since married people only require a single household, the rate breaks for joint filers are not always double what they are for single filers. At the highest incomes, the breaks for married and single filers become closer. To wit, the 37% bracket begins at $500,000 for single filers and $600,000 for joint filers.11 At that level of income, the rate structure assumes that married couples can afford to pay more tax than two single people who each earn half the total income.12
Whether married people pay more or less than they would as single filers depends on the allocation of income earned between them. Where one spouse earns all the income, the couple benefits from splitting their income; they receive a “marriage bonus” compared to what they would pay if they each paid tax as single filers.13 Where the spouses each earn half of the total joint income, they sometimes pay a “marriage penalty” compared to what they would have paid as single filers.14
The law could eliminate marriage penalties by doubling the rate break for married filers compared to single filers. But reducing marriage penalties simultaneously increases marriage bonuses. Under prior law, only lower-income taxpayers were protected from marriage penalties15 and guaranteed marriage bonuses in the rate structure, because the rate breaks doubled below the 25% marginal rate, covering single taxpayers earning up to $38,700 and joint filers earning up to $77,400.16 That structure makes a lot of sense for lower-income taxpayers. At the bottom of the income spectrum, reducing the secondary earner’s disincentive to work is an important policy that increases the real disposable income of low-income families. In addition, the earned income tax credit, which is available only to low-income taxpayers, contains a severe marriage penalty that other provisions in the Code might ameliorate.17
At higher income levels, increasing marriage bonuses may not be worth the lost revenue. But the TCJA increased marriage bonuses by doubling the rate breaks for married filers earning up to $400,000.18 Unlike prior law, which limited the marriage benefit to lower and middle-income families,19 the TCJA creates a clear subsidy for affluent traditional families. High-income earners can best afford to support stay-at-home spouses, and the marriage bonus incentivizes those spouses to remain out of the market. Stay-at-home spouses perform important untaxed work in the household that dual-worker couples must pay for out of after-tax dollars. Under the new law, these families are doubly benefitted by both the rate structure and the non-taxation of spousal work performed in the home.
The TCJA disfavors nontraditional families by imposing new burdens on taxpayers filing as heads of household—a filing status generally used by single mothers with children.20 On average, heads of households earn substantially less income than joint filers.21 The TCJA imposes a new obligation on tax preparers to investigate taxpayers’ eligibility to file as a head of household.22 Preparers are subject to a $500 penalty for each failure to exercise due diligence in making that determination.23 Consequently, the new law requires preparers to disproportionately police single mothers, which operates in contrast to the general expectation that taxpayers will honestly report their tax-relevant information to preparers and the government.
The new law makes heads of households objects of suspicion, despite the lack of evidence that unmarried adults with children are more likely to cheat on their taxes than others. Why single out individuals who are claiming that they support children? The law evinces no parallel suspicion of joint filers with children—in other words, the traditional family. It does not require that paid preparers investigate small businesses that may be hiding cash, even though a disproportionate amount of tax evasion occurs in those businesses.24 The new rule for tax preparers is simply a way to stigmatize unmarried adults with children, and make it harder for them to claim tax benefits. In contrast with the traditional family, a single adult with children is not considered normal under the tax law.
As a practical matter, paid preparers serving low-income communities will now be more likely to err on the side of treating mothers as single taxpayers, rather than heads of household, and consequently requiring them to pay more tax than they legally owe. The presumption that unmarried individuals with children are more likely to cheat on their taxes by claiming imaginary children feeds the worst stereotypes of the poor. Potential head-of-household filers are the new “welfare queens”—perpetuating the historic demonization of poor women.25 And unfortunately, many low-income taxpayers must use paid preparers because they lack access to other advice about preparing their returns, and because the earned income tax credit is too complex for many low-income taxpayers to navigate by themselves.26 There is a history of paid preparers scamming low-income taxpayers to increase their own fees,27 so Congress’s decision to encourage preparers to act against the interest of their low-income clients is particularly troubling.
The TCJA simplifies the tax treatment of families with children by repealing dependency exemptions for children28 and increasing the child credit in two ways: first, by increasing the credit amount to $2,000 per child,29 and second, by making it available to high-income taxpayers who previously were phased out.30 The phase-out range now begins at $400,000 of income for joint filers, and $200,000 for others.31 Because high-income families are better able to afford a stay-at-home parent, the increased income threshold is a benefit for those families. Under prior law, the value of dependency exemptions depended on a taxpayer’s marginal rate, but phased out altogether for high-income taxpayers.32 The interaction of the changes affecting families is hard to generalize—some families will enjoy net benefits from the cumulative changes and others will suffer from greater tax liabilities.
More importantly, the benefit traditional families enjoy from this legislative change is partly a product of what Congress chose not to do. Tax benefits for children have long taken two forms: one for children generally,33 and the other specifically for childcare.34 The dependent-care credit is designed for working parents, and alleviates the tax burden on parents who must pay for care with after-tax dollars.35 Tax benefits for childcare benefit only working parents.36 Unfortunately, because the credit is nonrefundable, it is unavailable to many parents who most need help affording quality care.37 Nonrefundable credits offset tax owed, but do not authorize the government to make payments, creating a crucial distinction between individuals with income tax liability and those without. 38 Because low-income taxpayers pay more payroll taxes than income taxes,39 it is arbitrary that tax credits are only allowed against income tax liability. All credits would be refundable under a fairer tax law.40
Instead of doubling the child credit, Congress could have used those resources to make the childcare credit refundable (and larger) so that low-income parents would receive a benefit. Tax benefits for expenses incurred in providing childcare promotes horizontal equity between taxpayers who pay for care and taxpayers who provide the care themselves, generally by a stay-at-home spouse. By choosing to increase the credit that is available to all taxpayers, including those who do not pay for child care, the TCJA privileges families with a stay-at-home parent—who enjoy tax benefits without offsetting tax costs.
The tax treatment of alimony has traditionally allowed the payer a deduction41 and required that the recipient include the amount in income.42 The TCJA changed the scheme so that neither party includes nor deducts alimony payments, effectively taxing the person who pays the alimony, rather than the one who receives it.43 Although largely conjectural at this point, family-law experts predict that the divorce rate will spike in 2018, as the TCJA provision repealing the deduction for alimony payments does not go into effect until December 31, 2018.44 Family law groups have also reported seeing a “real impact” of repealing the alimony deduction, with mounting pressure on couples to finalize divorces before the new tax changes come into effect.45
Since recipients of alimony are necessarily poorer than those who pay it, the new rule taxes alimony at the higher rate. For example, if W is taxed at a 10% marginal rate, and H is taxed at a 30% marginal rate, $100 earnings by H will be subject to $30 in tax, leaving him $70 to pay as alimony. Under prior law, the alimony would have been deductible to H, leaving him $100 to pay to W, who would have to pay $10 tax on that amount, leaving her $90 to spend. That $20 tax difference is why the revenue projections for the Act show that the change will substantially increase the revenue collected on alimony payments.46
Because the government will be taxing alimony more heavily than it did before, divorced couples will have less money between them after tax. In this way, the TCJA provides an incentive to stay married. Divorced spouses receive no benefit from the substantial marriage bonuses in the new law, and will have a higher burden on alimony payments. So, the TCJA favors the traditional family in which spouses remain married by simply taxing them less.
Alimony recipients will no longer pay tax, but they are unlikely to be better off. While it is possible that the poorer alimony recipient will have more money to spend now that her alimony is not being taxed to her (making her better off), the alimony payer will have less money to spend on alimony because his higher tax burden makes him worse off. If family law decisions—whether made by courts or agreement of the parties—ignore taxes, then alimony recipients may get a windfall from the law’s change. But rational people pay attention to taxes; taxes are effective nudges because people do change their behavior in response to them.47
Divorce lawyers should advise their clients to reduce the amount of alimony to take account of the tax change. That adjustment should be greater than the tax the recipient spouse would have paid under the old law because the payer spouse is subject to a higher rate of tax. Because the change in taxation of alimony increases the total tax burden on alimony payments, we can expect both parties to be worse off under the new law.
More importantly, the change in the alimony rules sends a message about financial responsibility within families.48 In contrast with the new law, the prior rule taxing alimony to the recipient created a framework of entitlement, even for women who depended on continuing financial support from their ex-husbands. Taxing alimony to the recipient is consistent with treating alimony as an earned amount, since earnings are always taxed to the earner.49 If we think about marriage as a partnership in which both spouses contribute inputs to produce shared returns, then the amounts earned in the market by one spouse are appropriately conceptualized as belonging jointly by both spouses. In an entitlement framework, both spouses contribute valuable services, and they share the benefits equally, without privileging market returns over nonmarket returns. The joint filing system reflects this conceptualization, as do the rules for property division in divorce.50 Prior law for alimony was also consistent with ownership rights for both spouses because divorcing spouses who received alimony included that alimony in income, like they would any other amount that they earned. The old rule signaled that alimony recipients deserved the alimony they received.
The new law changes that conceptualization by emphasizing the payor’s ownership and entitlement to the funds and treating the transfer from the payor to the ex-spouse like child support or a gift for tax purposes. This framework empowers market earners and weakens claims that nonmarket earners may have on family resources. In this story, alimony-receiving women are like dependent children who need to be supported, rather than equal partners in a community venture that produces both monetary and nonmonetary benefits for its members. By treating amounts paid as alimony the same as amounts paid to support one’s children—whether those children consume in the parent’s household or not51—the new law implies that ex-spouses are still financially dependent members of the market earner’s household.
In returning to the common law regarding alimony, we also return to an outdated notion about family economic power and responsibility. It is the responsibility of parents to support their children—parents have all the economic power in that relationship. The new alimony rule puts ex-husbands in the parent role, which suggests that it is the responsibility of former spouses to continue their spousal support after the marriage ends. Like child support, this approach concentrates power in the hands of the market earner, even though the non-market worker contributes substantial value to the family. In this way, the TCJA entrenches the power structure of the single-earner family, but does nothing to improve the financial well-being of dependent spouses. Because these are tax rules, they can change the price of paying alimony, but they cannot change the rules about when it is paid or how much former spouses receive pre-tax. Normalizing the dependent spouse in the tax law, as the TCJA does, does nothing to guarantee her financial support in property or family law.
Alimony rules are a poor way to encourage behavior in marriages because the timing is off. Presumably, spouses who will eventually receive alimony do not, at the time they are deciding whether to work in the market, think they will need it. They are simply not thinking about the consequences of divorce at that time. If they had anticipated the need for alimony, they would likely have developed more marketable skills or married another partner, making alimony unnecessary. The Internal Revenue Code has long encouraged secondary earners to be dependent on primary earners for financial support, while performing untaxed household work, rather than earning wages.52 The new alimony rules do not incentivize behavior throughout the marriage in the same way that the exclusion for imputed income and marriage bonuses incentivize secondary earners to stay out of the market.
The important incentive effects connected to the tax rules for alimony, then, must coincide with decisions about alimony. By the time of divorce, the secondary earner is financially dependent. At that time, the new law removes any incentive for primary earners to pay amounts as alimony, rather than child support, since the tax treatment of alimony and child support are now the same. The payment of child support in place of alimony might benefit children, but at a potential cost to their mothers. Even more important, as discussed above, the TCJA increases the after-tax cost of alimony payments, so we can expect that the amount and frequency of alimony will diminish under the new law. The TCJA’s economic effects are likely to contribute to the greater impoverishment of divorced women. Its expressive effects are likely to contribute to their social disempowerment.
The primary goal of the TCJA was to cut the rate of tax on corporate income,53 and many tax policy experts—across the political spectrum—agreed that the U.S income tax rate was too high by global standards.54 Corporate income is potentially taxed twice—at the corporate level (when earned) and at the shareholder level (when paid out as dividends). The double-tax regime can impose higher effective rates on corporate income than noncorporate income. But the rationale for reducing corporate rates does not extend beyond corporations.
Nevertheless, the TCJA also substantially reduced the tax imposed on income from noncorporate businesses, such as partnerships and other pass-through entities that tax income only to the owners and not to the entity.55 Consequently, the overall effect of the law is to reduce the tax burden across all holders of capital—people who earn money through investments. The TCJA exacerbated a distinction that already existed in the tax law. Capital income has long been subject to preferential rates56 and exempt from the payroll tax,57 but now it is even more preferred, regardless of the form.
A tax preference can be justified on fairness grounds if the taxpayer has a greater moral claim to some income than other income, or if the tax would impose greater harm in some cases than in others. For example, an income tax might include the increase in value of a taxpayer’s home over the course of a year.58 But a just tax system might exclude that value if it required taxpayers to sell their homes and move their families. The greater an individual’s moral claim to something, the less legitimate it is for the government to take it through coercion. Income taxation can be justified because individuals do not have moral claims to all of their pre-tax income.59
Proponents of the preference for capital income do not justify it on these terms. They argue that lower taxes on capital income incentivize more capital investment. That may be true, but it also may not be.60 In any case, that argument changes the subject because it is an efficiency argument, not an argument about social meaning and justice. Efficiency may be an important social value, but where efficiency and fairness are in tension, policymakers should be explicit about favoring one or the other. Policymakers should not reflexively prioritize efficiency over other public values, particularly in regulating economic entitlements.
Since all income is made possible by myriad forces, both public and private, an individual is only entitled to some of the income she creates. A lawyer earns income based on her own personal talent and effort, but also because government creates institutions that make her talents and efforts meaningful to others. Business income is the product of capital, labor, and social institutions, and taxation is necessary to distribute the products of social cooperation among all the people who deserve it.61 The TCJA’s tax reduction on business income strengthens the ownership claim of capital holders to that income. But this claim is based on a mistaken understanding of the social cooperation necessary to create value.
Determining who deserves a share of income is a decision made politically, but it is a fundamental question of fairness. Taxation is a tool of distributive justice because taxes can correct distributional injustices in the market. While markets can be helpful in determining desert,62 they are not designed to allocate resources according to a moral principle. Markets are designed to increase efficiency, not justice.63 Laws must supplement markets to achieve justice. Income taxation is a feature of just societies because people do not have unfettered rights to every dollar of pretax income they earn.64
For example, if free markets systematically undercompensated workers for their contribution to the social product, the law might tax-prefer their earnings compared to other types of income. Such a law could give workers a greater moral claim to their pretax income by granting them dominion and control over a greater percentage of their pre-tax income. The same is true for investors. In instituting a preference for a broad range of investment income, the TCJA reflects the notion that investors have a stronger claim to their earnings than do others. Elevating capital holders to a preferred place by taxing their income less heavily than the income of workers implies greater moral rights to that income. A lower, preferential rate of tax on capital income suggests that market returns to capital holders are a closer approximation of what capital holders deserve; the heavier tax on labor suggests that their market returns are excessive by comparison.
As income inequality has increased, capital holders have enjoyed a greater share of overall market returns.65 Because capital is more mobile than labor, globalization has allowed capital to seek out greater returns, imposing pressure on labor. The weakening of labor’s power, including the decline in unions,66 has left labor earners unable to push back in the market. The market has already shifted a substantial share of the social product to holders of capital, so the tax law’s more burdensome treatment of income from work exacerbates a market dynamic already in effect.
Given the philosophical substructure of the tax law, a policy that implies greater moral entitlement to capital returns than labor returns is odd. One principle underlying much economic policy reflected in the tax law is that individuals own their labor.67 The theoretical entitlement to earnings on capital stems from the ownership of labor, since capital must have been derived from labor at some point. Libertarian arguments make the strongest moral claims to capital income, but those claims are based on historical principles of entitlement that start with a person’s right to own his labor and base the right to investment income on that history.68 In prior work, I have been critical of this analysis.69 Nevertheless, the regime in the TCJA turns it on its head: If the taxation of capital gains cannot be justified in a libertarian framework, then the taxation of labor returns is even less legitimate. The TCJA gets it backwards by taxing labor income much more heavily than it taxes capital income.
It has been recognized that the tax law assumes people are autonomous, and I have previously argued that it is important for the tax law to respect individual autonomy.70 The TCJA takes that conception further than prior law by discouraging interdependence among individuals in employment relationships and local communities. The TCJA discourages employer-employee relationships, compared to independent contractor status. It also rejects the interdependence of communities by conceptualizing state and local taxes as equivalent to private consumption expenditures.
The employer-employee context and the local-government context raise different policy concerns that inform the desirability of interdependence.71 In the employment relationship, interdependence has traditionally implied health insurance and retirement benefits, so that interdependence has been necessary for the financial and personal security of workers. In a society (unlike the United States) with government-provided health insurance and generous public retirement benefits, employer-employee interdependence would be neither necessary nor desirable. Employee dependence on employer-specific benefits discourages job mobility and entrepreneurship. But weakening the bond between employers and employees is troublesome if it strips individuals of security and leaves them vulnerable.
In the local community context, increasing atomization may increase the likelihood that localities offer different packages of goods and services that individuals want. That is desirable if efficiency is the goal and everyone can afford a decent package. If people cannot afford the precise package they want, then treating taxpayers as though they are simply buying consumer goods is unlikely to improve overall welfare. In a welfarist framework, the distribution of benefits to those who can afford them least creates the greatest welfare gains. Interdependence in communities allows small welfare losses to some members of the community to be outweighed by large gains to others. Discouraging community interdependence threatens to leave the most needy without adequate public goods and services.
The new law creates incentives to operate as an independent contractor, or sole proprietor, rather than as an employee. Independent contractors are eligible for the new lower rate of tax for pass-through businesses72 and they are also allowed to deduct all their expenses in operating the business.73 By contrast, if characterized as an employee, the same person must pay a higher rate of tax and is not allowed to deduct employee business expenses under the new law.74 The preference for independent contractors reinforces the notion that individuals are autonomous and independent of one another. An employer-employee relationship implies substantial reciprocal obligation.
This is an important shift in the message of the tax law, and is actually quite perplexing, given other provisions favoring employer-employee interdependence that remain in the Internal Revenue Code. The tax law has long favored the employer-employee relationship as the source for employee consumption expenditures. Many employee expenses that incur tax when made directly by employees have long been tax-free if provided directly by employers.75 The TCJA did not change the preexisting preference for employee dependence on employer-provided benefits—the tax savings for employer-provided education, child care, retirement savings, and health insurance remain in the law post-TCJA, beside the new law’s incentive to sever the employer-employee bond.76
Confusing matters further, the TCJA makes employee business expenses nondeductible, even though employees can exclude those amounts when their employers pay for them.77 For example, an employee who buys her own work tools must now pay for them with after-tax income, and is no longer allowed a deduction. But an employee does not need to include the value of tools that an employer buys for her,78 and nor does she need to pay tax on amounts she spends on tools that are reimbursed by her employer.79 Consequently, it continues to be advantageous to be an employee in this respect.
Whether an individual is better off as an employee or an independent contractor depends on both the rate of tax applied to the income and the items that must be included in the tax base. Under the new law, the determination will be different for workers in different businesses—employees with few excluded benefits will prefer to become independent contractors to get the lower rate. But employees with lots of excluded benefits may prefer the higher rate on the smaller base. Beyond the individual tax calculus, independent contractors may be worse off than employees to the extent that they have an incentive to compete against one another, rather than collaborate for better pay or conditions.
Confusing matters further, the new law carves out certain professions, including doctors, lawyers, accountants, and artists, from the reduced pass-through rate—for no apparent reason.80 Encouraging some employees to become independent contractors could have an important effect on the nature of business relationships apart from taxation. Whether the law should encourage interdependence between employers and employees, or independence by service providers is a difficult policy question, but Congress should be more purposeful about the project.
Diminution of the deduction for state and local taxes81 was one of the most contested provisions in the new law.82 Critics have correctly recognized the provision as a way for Republicans in Congress—who passed the TCJA without a single Democratic vote—to punish blue states and raise taxes primarily on affluent Democrats.83 So perhaps there is no identifiable value hidden in the amendment to the deduction.
But a deeper analysis of the change reveals a potential shift in thinking about what state and local taxes do. It is possible to conceptualize state and local taxes as collective returns to communities, which should be shared by members of those communities. Institutions of government foster pretax income at every level, so state and local taxes, like federal taxes, can be understood as market-correcting tools that direct returns to communities, rather than individuals.84 In this understanding, state and local taxes are the distribution of social returns, so taxpayers are not individually entitled to those amounts.
This interpretation challenges inclusion in the federal tax base, providing a theoretical justification for the deduction. Because individuals do not enjoy dominion and control, the federal government should not consider those tax payments to be gross income of the individual taxpayers. Amounts paid in tax to states and localities do not constitute an accession to the personal wealth of the individuals who pay them. State and local taxes are collected under legal coercion, and are never really part of the private resources of state residents. Our ability to pay federal tax, in this conception, is affected by how much other tax we pay, as well as how much we earn. A federal tax deduction is necessary to account for the diminution in resources that state taxpayers have.
This conception of state and local taxes says nothing about whether individuals should have to include the benefits they receive from government in taxable income, but including benefits is not wholly consistent with the ability-to-pay norm underlying income taxation. To the extent that governments provide benefits to individuals, the tax system could require inclusion. Individuals could be taxed on the value of the public education they receive, the clean water they drink, and the military protection they enjoy. Under current law, where government benefits are provided in cash, they are sometimes included in gross income and subject to tax.85 Generally, however, such benefits are ignored for tax purposes. The valuation challenges in including all government benefits in taxable income would be substantial, and benefits taxation is an independent theory for tax design that has never received substantial traction.86
The TCJA treats state and local taxes just like private consumption. That model assumes that people pay taxes to buy services like schools and roads.87 Since expenditures for living expenses and luxuries are not deductible under federal law,88 state and local taxes should not be deductible if they are equivalent expenditures. If individuals receive valuable consumption in return for their taxes, then those taxes should not be deductible for purposes of measuring ability to pay other taxes. Where state and local taxes are simple consumption expenses, they resemble other nondeductible items. Taxpayers who do not value schools or roads are free to move to other jurisdictions that offer the package of taxes and services that they prefer.89
At the local level, this conception of taxes is plausible. But the larger the taxing jurisdiction, the less compelling this private-consumption story becomes. At the state level, surely, taxes do not translate into the equivalent of fees for services provided to individuals. This approach to state and local taxes rejects the notion of a shared community with public goods that cannot be valued for individuals. It assumes that states and localities have no role to play in distributing common resources.
It is ironic that Republicans are the ones sending this message about state and local taxes, because they have traditionally argued more vehemently than Democrats in favor of state sovereignty.90 The conception of state and local taxes as paying for private consumption reduces the power and function of the states in a federal system. Under the TCJA, the federal government becomes the sole protector of the public interest and the sole provider of public goods, with states and localities serving up private consumption according to market demands. The likely effect is a decline in public goods like infrastructure, education, and health care financed by the states.
Philanthropy requires resources, so it is nothing new that the wealthy are the most important donors to charity. Recent research shows that even before the TCJA, charitable contributions were concentrated in a diminishing slice of the population.91 Nevertheless, the tax law has historically supported charitable giving of a broader segment of taxpayers by allowing a charitable deduction for all itemizers. In addition, the Code has long limited the tax benefits attributable to charitable giving so that even the most generous philanthropists could not avoid paying taxes entirely.92 While these rules have allowed considerable plutocratic power and government subsidy to donations by the rich, the TCJA enables this bias substantially more by reducing the number of itemizers and increasing the level of allowable deductions. The TCJA does not fundamentally change the Code’s approach to charitable giving, but it exacerbates (and normalizes) the elitism that has long underlied the law.93 This is troubling given other changes wrought by the TCJA: tax cuts for the rich and bigger government deficits in the future. Concentrating philanthropy among the most elite is only tolerable if there is a sufficient level of taxation overall to guarantee public support of public priorities so that government leaves little need for private organizations to fill.
The TCJA simplified taxes for millions of Americans by substantially increasing the standard deduction (to $12,000 for single filers and $24,000 for joint filers).94 The charitable deduction is only available to taxpayers who itemize, so only taxpayers whose total itemized deductions exceed the standard deduction will continue to itemize. The Tax Policy Center estimates that the TCJA will reduce the number of taxpayers claiming the charitable contribution deduction by 21 million.95 While fewer taxpayers in the top 1% are projected to claim the deduction, fewer than half of former claimants below the 95th percentile will continue to take the deduction.96
The charitable deduction operates as a government subsidy to charities chosen by taxpayers. For example, an individual in the 35% rate bracket receives $35 in tax savings on a $100 gift to charity. When she makes that gift, it has the same effect as her paying $65 from her after-tax income and directing the government to pay the other $35.97 Consequently, the charitable deduction has been compared to a government matching grant.98 Individuals who can claim the charitable deduction are able to direct government subsidies to the charities of their choosing, while those who cannot claim the deduction must finance their charitable support without the government’s help.99
Even before the TCJA was enacted, nonitemizers were ineligible for the charitable deduction.100 Many of them gave to charity, and many will continue to do so despite the absence of federal subsidy. There are perennial proposals to extend the charitable deduction to nonitemizers or to convert the deduction into a refundable credit (which would be available to both itemizers and nonitemizers) in order to democratize the federal subsidy.101 Economists disagree about the efficacy of the charitable deduction as an incentive to give to charity.102 The TCJA is a natural experiment, and scholars will surely study the change in giving patterns for taxpayers who itemized prior to the TCJA but claim the standard deduction in the future. New standard deduction claimants may reduce their charitable giving. But even if they continue to give, the new law directs zero dollars of federal subsidy to the charities chosen by nonitemizers.
By subsidizing only charitable gifts made by the wealthy, the TCJA sends the message that charity is an important public priority for the rich, but not for others. This is problematic. First, it reinforces the notion that government need not provide the infrastructure necessary for equality and opportunity since the rich have a responsibility to provide private support for public goods. Relatedly, this message gives the rich the false and dangerous impression that their charitable giving is a reasonable substitute for paying taxes. Finally, the rich and the poor support different types of institutions, and privileging the giving of the rich undervalues the types of institutions supported by the poor.103
While reducing the number of taxpayers eligible to claim a deduction for charity, the TCJA also raised the limit on how much itemizing taxpayers may deduct, by raising the cap on deductibility from 50% to 60% of a donor’s income.104 The Code has long capped charitable deductions to ensure that even very charitable taxpayers must pay some tax.105 Before the change, taxpayers could deduct only half their income as charitable deductions, and now, they can deduct up to 60%. A cap on deductibility signals that charitable gifts are not a substitute for paying taxes; everyone must contribute a fair share to the expenses chosen by elected officials, and there is no private substitute for supporting those public purposes. Raising the cap undermines the message of compelled contribution to democratically determined priorities—it implies that amounts given to private institutions committed to public purposes resemble taxes paid to governments.106 Of course, the change in the cap is moderate—from 50% to 60%, so the revenue effects will be small, but the fact that Congress made any change is revealing.
The 50% cap did not present a problem that Congress needed to solve, and the change will lose some revenue. The increase to 60% will only provide a benefit to a miniscule number of very wealthy taxpayers who can afford to give more than half their income to charity in any year. Hardly anyone faces the cap—the average itemizer contributes 2% of income to charity. The way to hit the cap is to make large gifts out of wealth rather than income; Warren Buffett has this problem.107 The culture of philanthropy among the super-rich is sufficiently strong that the cap on deductions has not deterred the richest Americans from pledging to give away at least half their wealth.108 The cap primarily functioned as a symbol that charitable giving does not satisfy one’s civic obligation to contribute to the social structure,109 and the TCJA undermines this symbol. Charity is private in its operation, control, and funding. Charitable decisions are made in a plutocratic way. There is nothing wrong with that, as long as it is clear that taxes are not conflated with gifts to charity.110 The more the law allows charitable giving to substitute for taxes, the more it legitimates private control of public functions.
The new law is evidence that congressional policymakers believe in the value of tangible things.111 Even though studies have shown that happiness does not follow from buying things,112 Americans continue to accumulate a lot of stuff. And the new tax law seems to agree that physical things are best. Despite the rhetoric about prioritizing jobs for workers,113 the TCJA in fact encourages investment in long-lived assets more than investment in labor. The new law subsidizes the acquisition of long-lived assets by allowing their entire cost to be deducted in the year of acquisition.114 To the contrary, there is no bonus deduction allowed for wages paid to workers.115 If an employer hires people to perform services in its business, there is no subsidy because it cannot deduct the cost of paying the hirees in the future. The key to the subsidy for physical assets is the new law’s “expensing” for long-lived physical assets.116 Under income tax principles, the cost of long-lived assets should be deducted over time as they are used in the business;117 “expensing” allows the entire cost to be deducted in the year of acquisition. As others have explained, “[t]he new law subsidizes rather than taxes capital investments. In other words, the tax act subsidizes firms that buy robots over firms that hire new workers.”118
Standard tax policy analysis recognizes that deducting the entire cost of a long-lived asset in the year it is acquired is economically equivalent to exempting the future income from that asset from tax.119 This happens because the deduction allowed in the year of acquisition when a capital asset is expensed is bigger than the actual cost to the taxpayer in that year, since the asset will be useful in the business over an extended period. For example, if a taxpayer buys a machine that lasts five years for $100, part of that $100 is a cost of doing business in years two through five, but expensing allows it all to be deducted in year one. The deduction in the year of acquisition reduces the investor’s tax in year one, saving the investor taxes on other income equal to the cost ($100) multiplied by the taxpayer’s tax rate (assume 30%), or $30. The tax savings in the year of acquisition can be conceptualized as a government co-investment in the asset—the government invests $30 out of the $100 cost of the asset. The investor’s out-of-pocket investment is only $70. The government’s investment is repaid in later years when taxes are owed on income generated from the asset.120 While technically the investor makes a tax payment when the asset earns income, their rate of return is not diminished by tax.
Deducting the full cost in the year of acquisition is the key to effectively exempting the income from tax. Any tax paid in later years can be understood as the government receiving a return on its earlier investment. It does not matter what the tax rate is, as long as the rate of the deduction in the year of acquisition is the same as the rate of the amounts that are later included in income subject to tax. It is as though the government invested 25%, 30%, or 50% of the cost of the asset, and is later entitled to the same 25%, 30%, or 50% of the asset’s income.
The preference for things rather than people is reinforced by the TCJA’s treatment of capital income compared to labor income. While labor has long been subject to more burdensome taxation than capital,121 the TCJA exacerbates this inequality. The TCJA did not change the payroll tax, which is a tax imposed only on people who work. Instead, Congress reduced business taxes of all sorts—corporate and pass-through taxation,122 as well as reducing the only tax the United States has on accumulations of wealth, the estate and gift tax.123 All of these changes favor things over people, stuff over services, physical goods over experiences.
The real message of these provisions directly contradicts the rhetoric that its adopters spread about the law. The TCJA’s proponents claimed that the law was about creating jobs and improving the well-being of workers. But the law instead favors machines and business owners. While it is possible to make an argument that investments in machines will require more people, or that more money for investors will trickle down to better wages for workers, there is nothing in the rules adopted in the TCJA that gives taxpayers incentives for the second order effects. It is just as likely that business owners will replace workers with machines.
When we consider the social meaning of the particular provisions analyzed in this Essay, it is not surprising that the distributional consequences of the law are regressive. Each of the provisions discussed favors the affluent: traditional families, capital holders, philanthropists, and businesses. The tax law contributes to the perpetuation of traditional power structures, so it is imperative that scholars uncover its unarticulated biases. If parts of the tax law are borne of prejudice and inequality, it is crucial that those values are apparent. People need the opportunity to openly object to the codification of prejudice in the tax law. Obscuring the implicit messages of the tax law stifles debate.
In this Essay, I have explored the implicit moral and political message in the TCJA. In some examples, it is likely that the TCJA’s social meaning contradicts the stated intention of its drafters. In other examples, the Act likely reflects the unarticulated values of its framers. While I disagree with some of the values evidenced in the TCJA, my project here is not to debate them, but to expose them. Policymakers and citizens make a grave error when they treat the tax law as amorally technical or dispassionately economic.124 Only by explicitly identifying values is it possible to start a discussion about them. Justice in taxation is not possible without a full and honest examination of the law’s underlying principles.
Linda Sugin is Associate Dean for Academic Affairs and Professor of Law at Fordham Law School. I am grateful to Mary Louise Fellows for comments on an earlier draft and Hanna Feldman for research assistance.