I think I was misunderstood. I have no problem with school projects including children dressing up for something. If I let on otherwise, I stand corrected. The issue I have is not necessarily the end result of things but the way in which they are done. You have three situations here in a school. The extreme right-wing method would be "prevent" or "ban" something. The independent method would be to "permit" or "allow" something. The extreme left-wing method would be to "require" or "mandate" something. Maybe I read the article wrong but it sounded like the school was requiring students to dress a certain way instead of just allowing it. That is my issue.
Forcing something is generally just as bad as banning it. I wouldn't want the government to make it legal for someone to beat me on the street for being trans but I also wouldn't want the goverment to make it law that someone give me a hug either.
As to your example of racial epithets, the above applies and I take the "independent" approach. If a child is using racist language in a classroom and disrupting the education, then obviously that should be against code of conduct because one child is interfering with another child's learning. If it is said during a break or lunch, sorry but it is protected free speech. Someone yelled obscenities at me for being trans when I was walking down a street. I didn't call the police because guess what? Their speech was perfectly legal. Now, if the child using such language continues to harrass another child or makes threats against him or her, then that is different. Just like in my example, if the person that yelled at me continued to follow me around and wouldn't leave me alone, then that would be illegal harrassment and then I would have grounds to have him arrested. The same child that would have the free speech to say something to offend another child would mean that ten other children would also have the free speech to correct the offender.
Ultimately, as always this comes down to a freedom issue, not a feelings issue. I have the right to enter a McDonald's and not be harrassed, threatened, or attacked for being trans. I don't have the right to enter a McDonald's and be unanimously accepted by everyone in the restaurant. McDonald's would also have the right to tell me they don't want my business and then I would have a right to get 100 of my friends together to protest and expose the company's discrimination.
Proper progress is made when people utilize their free speech and openly discuss issues. Trans people are not going to get trans rights by hiding silently in the background trying to force the government to force businesses not to discriminate and force schools to make everyone accept us. We would have equal rights tomorrow if every trans person (pre and post transition) came out of the closet all at once and showed the world that they are just as normal as everyone else and that we pay taxes too.
Companies can easily get away with discrimination against racial minorities, gender, and a host of other things. But most companies don't discriminate because they also value the business that those minorities bring and see that those minorities are also normal people as well. Gay rights have not been coming about because of laws being changed. They have been created because gays started coming out of the closet.