The tax plan now under consideration by Congress is remarkable for its consistency: a raft of provisions that disproportionately benefit corporations and wealthy Americans and do little for poor, working- and middle-class people.
On the front end, there are straightforward giveaways like the corporate tax rate cut and repeal of the estate tax. On the tail end, there’s the damage that the tax cuts will do when public revenues have plunged and the deficit hawks step in, claiming there’s no choice but to slash federal spending even further. In the middle, there are empty promises to poor, working- and middle- class Americans. The result could be an acceleration in the worsening economic inequality that has been taking shape for decades.
Tax Cuts for Billionaires
In response to a climate of growing economic inequality, in which the wealthiest individuals have left everyone else further and further behind, the Trump tax plan would double down on solidifying wealth at the top. By one estimate from the Institute on Taxation and Economic Policy (ITEP), based on an initial version of the Trump plan, more than two-thirds of the proposed tax cuts would go to the richest 1 percent of Americans. That means people who earn at least $615,800 a year would enjoy an average tax cut of $90,610 each. The average tax cut for the 1 percent is bigger than the amount the vast majority of Americans earn in a year.
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Meanwhile, middle earners — those who earn between $41,000 and $66,000 a year — would see an average tax cut ranging from about $400 according to ITEP’s early estimates, or about $1,100 according to the Trump plan’s own estimates. Either way, that’s just an average — some taxpayers in this income group would actually owe more in taxes under the Trump plan.
The average tax cut for the 1 percent is bigger than the amount the vast majority of Americans earn in a year.
In all, the ITEP study estimates that the Trump tax plan as originally formulated would give more than $100 billion in tax cuts to the top 1 percent of earners. That’s enough to fund the annual budget for food stamps (SNAP) and other federal nutrition programs.
The notable giveaways to wealthy individuals include a reduction of tax rates for top earners and a consolidation from the current seven tax rates to only three. There’s a particularly nasty subterfuge here: By officially keeping the current top tax rate of 39.6 percent, Trump and his allies hope to disguise the fact that, due to the way taxes are calculated, billionaires will also benefit from the lowering of the bottom tax rate — and they’ll pay less in taxes over all.
Then there’s the elimination of the alternative minimum tax — a mechanism to ensure that even in a system riddled with loopholes, wealthy taxpayers still contribute a bare minimum. Finally, there’s the repeal of the estate tax — a tax that in 2017 affected only estates worth more than $11 million. The Trump gimmick here is that the estate tax will be phased out gradually — thus saving face, given how much this tax cut for wealthy heirs will actually cost the nation.
What all of these proposals have in common — from repeal of the estate tax to the so-called special “pass-through” rate — is that they benefit only the wealthiest Americans.
Squeezing the Middle Class and the Poor
Under the Trump tax plan, some middle- and upper-class Americans could actually pay more in taxes. Taxpayers with incomes from $111,100 to $615,800 would be most likely to pay more in taxes than they do under the current system. But according to the initial estimates from the ITEP study, one in seven taxpayers in the middle of the income distribution — with incomes from $41,000 to $66,000 — could also pay more.
One reason is the proposed changes to the state and local tax deduction, which would now only apply to property tax, not state or local income tax. This tenet of current tax law allows taxpayers to forego paying federal taxes on the taxes they pay to state and local governments. This way, state and local governments are not punished for levying adequate taxes to cover locally funded services — like many roads, K-12 schools, and more. The deduction recognizes that few people are able to choose where they live based on local and state tax rates, and so avoids punishing those who live in areas with relatively high taxes. The trick is that this deduction is popular among middle- and upper-income households. With the new limits, many of them could end up paying more in federal taxes.
The estate tax will be phased out gradually — thus saving face, given how much this tax cut for wealthy heirs will actually cost the nation.
As for the poor — those people who earn less than $23,700 a year — they can expect a tax cut of about $80 a year according to ITEP’s initial estimates. This is hardly the stuff of ending poverty. The Trump plan misses many opportunities to help lift up poor and struggling Americans. For instance, it expands the Child Tax Credit for middle-income families, but fails to expand the portion of the credit that most helps the lowest-income families.
Hoarders, Corporate Edition
The biggest single tax giveaway in the Trump proposal is a cut in the corporate tax rate.
Corporate tax rate discussions are often hijacked by misleading claims about how high or low the corporate tax rate in the United States is now, and what the consequences for US competition are. However, the most relevant facts are these: The corporate tax rate is officially 35 percent; almost no corporation actually pays that much, thanks to a complex system of loopholes and deductions; and many profitable corporations actually manage to pay nothing at all in federal income taxes.
In a study of 258 profitable Fortune 500 corporations, the average effective tax rate — what the corporations actually paid to the federal government — was about 21.2 percent from 2008 to 2015.
The poor can expect a tax cut of about $80 a year. This is hardly the stuff of ending poverty.
A majority of Americans, including one-third of Republicans and two-thirds of Democrats, think large business and corporations should pay higher, not lower, taxes. The Trump answer to that is familiar to anyone who lived through the presidency of Ronald Reagan: The largesse at the top is supposed to “trickle down” to the masses.
What actually happens when corporate tax rates are slashed is that corporations mostly do just what they would have done anyway, in terms of worker pay and job creation, and CEOs and stockholders take home the difference. A recent study found that instead of being potent job creators, profitable corporations that paid the lowest taxes actually cut jobs, on average.
But even if it won’t create new jobs, will the corporate tax cut somehow result in higher wages — as much as $9,000 higher for some workers, as the Trump administration has claimed?
Don’t count on it. According to Harvard economist Mihir A. Desai, a self-avowed supporter of corporate tax cuts, any trickle-down wage increase from a corporate tax cut would be more likely to be in the hundreds, not thousands, of dollars. Meanwhile, former Treasury Secretary Larry Summers has called the Trump administration’s claims of higher wages after a corporate tax cut “dishonest, incompetent, and absurd.”
A Downward Spiral of Inequality
It’s conventional wisdom that nobody likes paying taxes — but in reality, Americans are strongly supportive of a government role in many parts of our society, including education, health care, job training and national security. Paying taxes may not be fun, but it’s the key to a program of aggressive public investment in the kind of society we all want.
And there lies the final failure of this tax plan: It would constitute a massive loss of federal revenue to the tune of at least $1.5 trillion over 10 years — and quite possibly even more. A revenue loss that extreme leads down a clear path to a future where the federal government’s role in education, job creation, health care, the environment and other areas will be called into question as unaffordable.
This tax plan would constitute a massive loss of federal revenue to the tune of at least $1.5 trillion over 10 years — and quite possibly even more.
To put that into context, $1.5 trillion is enough to fund all federal education spending, job training, the threatened Environmental Protection Agency and the State Department, homeless assistance and welfare many times over. It’s enough to keep both Medicaid and Medicare running for a year. Not only does the Trump tax plan fail to deliver on substantial tax cuts for the poor, working and middle class, it’s also likely to lead to cuts in popular investments that help combat inequality. The upside is that the magnitude of the proposed giveaways to corporations and the wealthy make clear that we have the resources to invest in the priorities that Americans care about. That reinvestment, however, simply could not happen under the Trump tax plan.
The Politics of Tax Reform
Much of the political analysis on the Trump tax plan’s chances of passage understandably focuses on whether the Republican Party will stick together and get it done. Those analyses are worthwhile, but they miss an important lesson of politics in the era of Trump and the possibilities for resistance.
If this tax plan passes in whole or in part, it will be for two reasons: First, because powerful and highly organized special interests, who stand to gain from the plan’s passage, have brought their full resources to bear; and second, that false representations of the Trump plan have muddied the waters enough to effectively mute public resistance.
If the tax plan fails, it may be due to a lack of cohesion among Republicans — but, just as likely, it may be a result of civic action and a shared understanding of the plan’s real winners and losers. Just as confusion can lead to inaction, understanding can spur action.
It’s up to all of us to show our legislators that we know the score, and that we plan to hold them accountable.