Trump Tax Plan 2.0 Cements the Worst Economic Policy in a Generation

Trump Tax Plan 2.0 Cements the Worst Economic Policy in a Generation

Hot on the heels of last year’s once-in-a-generation tax changes, House Republicans are pushing a new, extended plan to double down on their previous efforts, which primarily awarded tax giveaways to corporations and the wealthy.

The focus this time is on making permanent some individual tax provisions that were left temporary in the 2017 law. Like their predecessors from tax plan 1.0, these provisions disproportionately reward the richest 1 percent of Americans, and add hundreds of billions of dollars to the deficit while emptying public coffers.

In a time of ever-worsening economic inequality, tax plan 2.0 reads as a resounding failure to bring about real solutions and doubles down on some of the worst policy decisions in a generation.

Flashback to 2017: What the Last Bill Did

The new plan from House Republicans follows on the heels of the 2017 Trump tax plan that was signed into law and is now in effect. The core changes instituted by that law were a massive cut in the corporate tax rate, from 35 percent to 21 percent; cuts in individual tax rates that mostly benefited the wealthiest Americans; and changes to the estate tax that allow multimillion-dollar estates to avoid paying the tax. The result of the first tax plan, referred to often as tax plan 1.0, have provided drastically greater benefits to corporations and the wealthy than to poor or middle-class Americans.

Recent research has borne out what critics said would be the case for the tax cuts. Corporations have used the cuts largely to build up their own profits by buying their own stock, rather than investing in new productivity that could create jobs. Corporate profits have grown by a generous 4.5 percent since 2016, but they have grown by nearly 15 percent after accounting for the tax cuts.

Analysis of the original tax plan also shows that already, in 2018, half of the benefits will go to the richest 5 percent of Americans.

Tax Plan 2.0 Doubles Down

Due to arcane Senate procedure and previous laws targeted at reducing the debt, proponents of the first tax plan had to limit its effects on the deficit after 10 years. Their solution was to have individual tax cuts – the same cuts that primarily benefit the wealthy – “sunset,” or automatically end, before the 10-year mark, so that they could no longer contribute to projections of the deficit.

Making the tax cuts temporary was never a desired policy goal for its proponents, though. The core of tax plan 2.0 is to make these cuts permanent.

Tax cuts for the wealthy took three major forms in tax plan 1.0: a cut in the top tax rate; new limits on the estate tax; and tax deductions for owners of certain businesses, most of whom are already wealthy. Each of those cuts would sunset in 2025 under tax plan 1.0. As proposed by House Republicans, tax plan 2.0 aims to make each of these cuts permanent.

First, the plan makes permanent a cut in the top tax rate from 39.6 percent to 37 percent. This may not seem large, but consider that this change alone would give a couple earning $2 million a tax cut of $36,400. Also significant is the fact that even the 39.6 percent rate was low by historical standards. From the 1960s through the 1980s, the top tax rate varied between 50 and 94 percent. (Ninety-four percent may seem unbelievable, but the top rate only applied to income above a certain level. Income below that level was taxed at a lower rate and everyone, rich or poor, paid the same lower rates.)

Next, tax plan 2.0 makes permanent a change to the estate tax. The estate tax used to apply to estates worth $11 million or more, for a couple. Tax plan 1.0 doubled the threshold for the estate tax, so that now only estates worth $22 million or more, for couples, are subject to the tax. Tax plan 2.0 makes this change permanent.

Third, the plan makes permanent a tax cut for owners of “pass-through businesses.” Thanks to their legal structure, these businesses don’t pay corporate income taxes on their profits, but instead distribute their profits to their owners as individual income. Under tax plan 1.0, owners of pass-through businesses can take a tax deduction resulting in significantly lower taxes on income received through one of these corporations. Tax plan 2.0 makes this change permanent, as well. According to analysis by the non-partisan Joint Committee on Taxation, 61 percent of this tax change will benefit the richest one percent of Americans.

An analysis by the Center on Budget and Policy Priorities shows that extending the individual tax provisions of tax plan 1.0 would cut taxes for the richest one percent (an income of $836,200 or higher, in 2026) by $40,180 per year, as much as many Americans earn in a year. Meanwhile, the bottom 60 percent of Americans would receive an average tax cut of just $480.

Less significant and less controversial, the plan would also make it somewhat easier for small employers to offer their employees 401(k)-type retirement accounts, expand the ability for Americans to invest in related but different Individual Retirement Accounts, and create a new Universal Savings Account for tax-free savings.

All of these smaller proposals have one thing in common: The lowest-income Americans have no real ability to benefit. These plans all depend on the ability of the individual to set aside money for retirement or savings. But only five percent of Americans with incomes under $20,000 participated in available 401(k) plans offered by their employers. In a world of plentiful jobs but not enough good jobs, nearly one in four Americans have no savings whatsoever.

While tax plan 2.0 consists of multiple pieces of legislation and touches on everything from tax cuts to retirement accounts, the permanence of the individual tax cuts is the driving political force behind the legislation, and provides its most dramatic real-world implications.

Doubling Down on Inequality

Consolidating wealth at the top of the income spectrum is not a stated goal of the tax plan, but it is the effect. Taken together with decades of compounding income and wealth inequality, tax plan 2.0 deals a serious blow to the possibility of economic mobility in this country.

The richest one percent of Americans now take home an average of 26 times as much income as the bottom 99 percent. In 2016, it would have taken a middle-income worker 347 years at a large corporation to earn as much as the CEO earned in a single year. It didn’t used to be that way: In 1980, it would have taken that worker 40 years to earn as much as the CEO. And average wages for the lowest income workers have actually declined, after adjusting for inflation, since 1979.

The tax system has long presented a way for the government to address poverty, income inequality and related ills with the Earned Income Tax Credit, which is a popular and respected tax tool for boosting the incomes of the working poor. That potential is lost in the world created by tax plans 1.0 and 2.0. This new duo of tax plans considerably restructures the tax system so that instead of mitigating or reversing inequality, they add to the problem.

The tax plan doubles down on inequality in a more subtle way, too. In 2028, provisions of tax plan 2.0 could cost the U.S. government $267 billion in lost revenues, according to a study by the Joint Committee on Taxation. To put that in context, the federal government now spends only $70 billion for food stamps; $9 billion for Head Start; and $8 billion for the Environmental Protection Agency. The lost revenue could cover all of these and many other programs.

What’s Next?

Introduced by House Republicans among whom it enjoys solid support, tax plan 2.0 is widely considered to be a no-go in the Senate, where it would need 60 votes to pass. A mix of concern over rising deficits and unpopularity of changes to the state and local tax deduction could make Senate passage difficult.

However, that may not be the end of it. House Republicans may reintroduce the bill, or aspects of it, after the midterm elections. And then, there is still tax plan 1.0, which is already the law of the land. Defeating tax plan 2.0 would be a start. Repealing tax plan 1.0 might be a harder battle.