Republicans vs. Democrats on Taxes: What's the Difference?

We often boil down the tax policy of our major political parties to its simplest form: Democrats raise taxes to fund social programs, and Republicans lower taxes to benefit big businesses and the wealthy. Both ideas oversimplify the policy of each party, yet both ideas are essentially true.

Whether you agree with more government spending or tax breaks for corporations, each party's agenda will affect your taxes.

"We believe government should tax only to raise money for its essential functions," the Republicans state their case plainly on the Republican National Convention website. That is, Republicans believe government should spend money only to enforce contracts, maintain basic infrastructure and national security, and protect citizens against criminals.

The literature of the House Republican Conference goes on to illuminate the role of the government and how tax policies affect individuals: "The money the government spends does not belong to the government; it belongs to the taxpayers who earned it. Republicans believe Americans deserve to keep more of their own money to save and invest for the future, and low tax policies help drive a strong and healthy economy."

Tax relief is the Republican route to growing the economy. A Republican government would reduce taxes for businesses to allow them to grow and presumably hire more employees. Republicans also seek to limit income taxes for individuals so that people can hold on to more disposable income, which they can then spend, save, or invest.

The tax policy for the Democratic Party calls for raising certain taxes to provide money for government spending, which in turn generates business. The party platform asserts that government spending provides "good jobs and will help the economy today."

Many Democrats are adherents to Keynesian economics, or aggregate demand, which holds that when the government funds programs, those programs pump new money into the economy. Keynesians believe that prices tend to stay relatively stable and, therefore, any kind of spending, whether by consumers or the government, will grow the economy. 

Like the Republicans, Democrats believe the government should subsidize vital services that keep cities, states, and the country running: infrastructure (e.g., road and bridge maintenance) and repairs for schools. Democrats also call for tax cuts for the middle class. Who benefits most under each platform? The conventional wisdom is that corporations and the wealthy will benefit more with a Republican tax policy, while small businesses and middle-class households will benefit from a Democratic tax policy.

[Important: Whether you agree with more government spending or tax breaks for corporations, each party's agenda will affect your taxes.]

Many of the quarrels that flare up when people debate tax policy evolve out of misunderstood concepts. Possibly the most misunderstood concept is the tax rate. We hear that a politician wants to raise taxes on income and we cringe, convinced that higher taxes will whittle away every dollar we earn. However, we don't pay a flat tax; we pay income taxes at a marginal rate.

The marginal tax rate is the rate you pay on the last dollar of income you earn. For example, if you were single in 2019 and you brought in $50,000, you fell into the 22 percent tax bracket. That doesn't mean that every dollar was taxed at 22 percent.

Thus, when a Republican administration announces lower taxes, it is lowering the marginal tax rate—and critics grumble that the decrease benefits folks sitting on the higher rungs of the income ladder. Similarly, when Democrats announce an increase to the marginal rate, critics gripe that the increase will burden only high-income earners. 

Of course, filing taxes is never as simple as plugging in your income and calculating your marginal rate. The IRS has bequeathed us a mishmash of regulations, deductions, credits, and other magical formulas to thwart our efforts to file a quick federal return. Both political parties agree that the colossal tax code needs to be restructured and simplified, and, of course, each party has its own plan for how to tackle the problem.

The Democrats state that they "will shut down the corporate loopholes and tax havens and use the money so that we can provide a … middle-class tax cut that will offer relief to workers and their families."

The Republicans assert that they "support giving all taxpayers the option of filing under current rules or under a two-rate flat tax with generous deductions for families. Religious organizations, charities, and fraternal, benevolent societies should not be subject to taxation."

Conservative think tanks denounce the Democrat tax policy and its Keynesian ideology as wasteful spending that injects only temporary money into the economy yet praises Republican tax policy for protecting businesses, investments, and personal income. The liberal establishment condemns the Republican tax approach—and supply-side economists—as funneling money only to the wealthy and big corporations while commending Democrats for spreading the wealth, supporting small business, and reaching out to lower-income workers.

Both sides have their own experts and statistics lined up to support their economic dogma, but tax policy is complicated and tightly interwoven with many other aspects of government. The benefits of one approach may take years to materialize, which can frustrate our ability to distinguish which tax cuts or which tax increases fuel growth. 

• Republicans believe government should spend money only to enforce contracts, maintain basic infrastructure and national security, and protect citizens against criminals.
• The tax policy for the Democratic Party calls for raising certain taxes to provide money for government spending, which in turn generates business.
• Both political parties agree that the colossal tax code needs to be restructured and simplified.