President Trump and congressional Republicans have pitched their tax plan as a boost for the middle class.
“The rich will not be gaining at all with this plan,” Trump told reporters during a meeting with lawmakers in mid-September.
But analysts at the nonpartisan Tax Policy Center who studied the proposal reached a very different conclusion. They predict that nearly three-quarters of the savings from the tax overhaul would go to the top 20 percent of earners — those making more than $149,000. More than half the savings would go to the top 1 percent — people who earn more than $732,800. The tax breaks are even more tilted to the wealthy by the 10th year of the overhaul, when the Tax Policy Center projects nearly 80 percent of the savings would go to the top 1 percent of earners.
Administration officials have tried to discredit the center’s analysis, noting the tax plan is so far just a framework with many of the details still to be filled in by Congress.
“All I can tell you is that no one can make real detailed analysis of the plan yet, because it’s not finished,” White House budget director Mick Mulvaney said Sunday on CNN’s State of the Union.
The Tax Policy Center analysts acknowledge having to make some assumptions as they did their review. They based those assumptions on reasonable sources, including past Republican tax blueprints and the administration’s own April outline.
The center has promised to revise its forecast as lawmakers fill in the blanks of the tax plan. But the big picture is not likely to change.
“It’s going to be hard to mold this into something where the middle class is the big winner. And the reason for that, or course, is that the upper-income earners are those that pay the most in taxes,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget. “If you’re going to reform the tax code, a lot of times it’s going to be the people who pay the most taxes who end up with those bigger breaks.”
Wins for middle class appear largely indirect
The tax benefits for the rich in the GOP plan are direct, obvious and easily quantified. Many of the promised benefits for the middle class, on the other hand, are indirect, speculative and uncertain.
For the wealthy, the government is promising to cut their tax bill directly, by offering a lower income tax rate and by doing away with targeted levies such as the alternative minimum tax and the estate tax. The AMT hits only upper-income taxpayers and the estate tax hits only people with nearly $5.5 million in assets (or nearly $11 million for married couples). The Tax Policy Center says eliminating those taxes provides a direct, $678 billion benefit to top earners over the next decade.
Many middle-class families would also benefit from a lower income tax rate, but their savings would be dwarfed by those the wealthy enjoy. The Tax Policy Center estimates the average middle-class taxpayer would get a break of $940 from the GOP plan next year, while a taxpayer in the top 1 percent would save $146,470. For those on the lower rungs of the income ladder, the Republican plan actually boosts the tax rate from 10 to 12 percent.
“This is a GOP tax plan?” tweeted an incredulous Sen. Rand Paul, R-Ky., on Monday, noting the Tax Policy Center’s projection that nearly 30 percent of middle-class families could see their tax bills rise by decade’s end. “I hope the final details are better than this.”
This is a GOP tax plan? Possibly 30% of middle class gets a tax hike? I hope the final details are better than this. https://t.co/lcjkI4YRz8
— Senator Rand Paul (@RandPaul) October 2, 2017
So how do the tax plan’s supporters claim that it’s focused on the middle class? By highlighting speculative, indirect gains that are supposed to result from economic growth.
“This is a revolutionary change,” Trump said in announcing the plan in Indiana last week. “The biggest winners will be the everyday American workers as jobs start pouring into our country, as companies start competing for American labor, and as wages start going up at levels that you haven’t seen in many years.”
House Speaker Paul Ryan, R-Wis., makes a similar claim. “This is a once in a lifetime opportunity that is all about more jobs, fairer taxes and bigger paychecks for American families,” Ryan told reporters.
Rather than simply promise that the government will cut the tax bill for working families — many of whom pay little income tax already — the GOP is arguing that its tax plan will promote growth, which in turn will boost employment, and over time result in higher wages. Break any link of that chain and the middle-class “winnings” end up in someone else’s pocket.
Cut to corporate tax rate
A centerpiece of the GOP plan is a deep cut in the corporate tax rate, from 35 percent to 20 percent. The Tax Policy Center estimates that provision, along with repeal of the corporate AMT, would save corporations nearly $2 trillion over the next decade. Where would that money go? Traditionally, it’s been assumed that most of the savings of a corporate tax cut go to business owners or shareholders, who tend to be upper-income. But some portion also goes to workers in the form of higher wages. How those spoils are divided determines the big winner when corporate taxes are reduced.
Forecasters at the Congressional Budget Office and the Joint Committee on Taxation, for example, assume that about three-quarters of the savings from a corporate tax cut goes to shareholders, while the remaining one-quarter goes to workers. Until recently, the Treasury Department assumed a similar breakdown, with owners taking the lion’s share and workers receiving about 18 percent.
The Trump administration argues that a much larger share of corporate tax cuts — 70 percent or more — will ultimately flow to workers. That’s far from a consensus view, but it’s the position advocated by Kevin Hassett, an economist formerly with the conservative American Enterprise Institute who now chairs Trump’s Council of Economic Advisers. If Hassett is correct, that would shift more of the $2 trillion in savings from the corporate tax cut down the income ladder, from wealthy shareholders to middle-class employees.
Standard deduction vs. personal exemptions
Backers of the GOP plan say many middle- and working-class families would benefit from the near doubling of the standard deduction. That would exempt the first $12,000 of earnings for individuals and $24,000 for couples from income tax. The higher standard deduction would also free many taxpayers from having to itemize, making tax filing simpler. But while Republicans want to expand this tax break, they’re planning to take away many others, including personal and dependent exemptions, which reduce taxable income by $4,050 for each taxpayer, spouse and dependent in a household.
This combination could leave a couple with two children worse off. Their standard deduction would increase by $11,300 (from $12,700 to $24,000). But their four exemptions, totaling $16,200 would disappear, leaving them with more taxable income and a higher tax bill. For couples with three or more children, the situation is potentially worse. This might be offset by a larger child tax credit Republicans have promised, but that depends on details that have not yet been worked out. In addition, taxpayers who continue to itemize would lose their personal exemptions without the offsetting benefit of a larger standard deduction.
The Tax Policy Center estimates that boosting the standard deduction will leave an extra $830 billion in taxpayers’ pockets over the next decade, while eliminating personal and dependent exemptions will increase taxes by $1.6 trillion.
State and local tax deduction
Republicans have promised to preserve the tax deductions for mortgage interest and charitable giving, along with unspecified tax incentives for retirement savings, work and higher education. Most other tax breaks are on the chopping block, but the only one that lawmakers and the administration have singled out for elimination is the deduction for state and local taxes.
“One of the things we’re trying to do is eliminate lots and lots of deductions,” Treasury Secretary Steven Mnuchin told NBC’s Meet the Press. “One of those deductions is about getting the federal government out of the business of subsidizing the states.”
If state and local taxes were no longer deductible, the federal government would collect an extra $1.3 trillion over the next decade, according to Tax Policy Center. The move would particularly hurt taxpayers in relatively high-tax states, many of which lean Democratic. According to the Tax Foundation, more than half the total value of the deduction is claimed by taxpayers in just six states — California, New York, New Jersey, Illinois, Texas and Pennsylvania.
With the exception of Texas, all of those are blue states. But as Senate Minority Leader Chuck Schumer, D-N.Y., points out, there are many taxpayers in GOP districts who would be unhappy to see the deduction for state and local taxes taken away.
“My guess is you’re going to have 30, 40, 50 Congress members — Republican — who say, ‘I can’t vote for this because it raises taxes on my core constituency,’ ” Schumer said on Sept. 27, the day the plan was released.
The role of economic growth
The administration and congressional Republicans describe their tax plan as a key ingredient in the recipe for faster economic growth. They’re counting on that to boost federal revenues.
“We believe there will be $2 trillion of additional growth” over the next decade, Mnuchin told ABC’s This Week.
Many independent observers think that’s overly optimistic, especially with the economy near full employment, an aging workforce and an administration determined to limit immigration.
“We’ve seen a lot of modeling of tax plans before and we’ve seen what’s happened when we’ve reformed the tax code before,” said MacGuineas. “You can grow the economy by — perhaps if it’s done well — a couple of additional tenths-of-a percent of GDP. And that would be great. We should celebrate getting that done. But we should also be realistic and we shouldn’t try to pay for things with wishful thinking.”
The Tax Policy Center says it expects the GOP plan would have “little macroeconomic feedback effect on revenues over the first decade.”
Effect on deficits and debt
The tax cuts in the GOP proposal would reduce government revenues by trillions of dollars. Some of that would be offset by closing (mostly unspecified) loopholes. But the Tax Policy Center still predicts an extra $2.4 trillion in red ink over the next decade. If Republicans’ promised level of economic growth fails to materialize, all of that would be added to the federal debt.
That worries deficit hawks like Sen. Bob Corker, R-Tenn. He expects to raise some revenue by eliminating tax breaks and through economic growth. But Corker told NBC’s Chuck Todd, he’s not willing to put the balance on the government’s credit card.
“If it looks like to me, Chuck, we’re adding one penny to the deficit, I am not going to be for it, OK?” said Corker, who is not planning to run for re-election.
With a narrow two-vote majority in the Senate, Republicans can ill afford further defections.