The Senate Tax Bill Favors the Middle Class, Not the Rich

By
Chris Edwards

This article appeared in the National Review
(Online) on December 5, 2017. 

Republicans are close to passing the largest federal tax
overhaul in decades. The corporate reforms are impressive and
promise to lift all boats in coming years with a rising tide of
growth. The bill has moved forward despite an unrelenting
Democratic effort to smear it as an unfair giveaway to the
rich.

The Democratic class warfare will continue even after President
Trump signs the bill, and that will create two big problems. The
first is that the Democrats will probably pursue a long-term
campaign to repeal the pro-growth elements of the bill, as they did
with the George W. Bush tax cuts. The second is that if Republicans
attempt to cut spending in the coming months and years, the
Democrats could make political headway by complaining that tax cuts
for the rich led to benefit cuts for everyone else.

So Republicans need to counter biased claims about the tax
bill’s distributional effects. In reality, middle-income households
will receive the largest tax cuts, as a percentage of what they
currently pay, under both the House and Senate bills. But that fact
is not apparent in reports by the three groups calculating detailed
statistical results: the liberal Tax Policy Center (TPC), the
congressional Joint Committee on Taxation (JCT), and the
conservative Tax Foundation.

The TPC has an expert team, but it presents data on who benefitsfrom tax cuts in a selective way. In its study of the Senate bill, for example,
TPC’s main distribution table shows that the top quintile of
households would receive average tax cuts of $5,740 in 2019, while
the middle quintile would receive only $850. It also notes that the
former see a boost to their after-tax income of 2.2 percent,
compared with 1.4 percent for the latter. The rich would get much
bigger cuts!

To put those cuts in proper context, you need to dig on TPC’s
website and do some math. It turns out that the top quintile will
pay about $69,000 in income and estate taxes in 2019 under current
law, while the middle quintile will pay just $3,700. So the top
group will pay 8 percent less than they otherwise would, while the
middle group will get a much larger 23 percent cut.

The JCT also publishes slanted distributional tables. For 2019, the JCT shows that the Senate bill
would cut taxes 7 to 9 percent across income groups, except those
earning over $1 million would get a 5 percent cut. So the cuts seem
fairly equal, although a bit smaller at the top.

Those results are skewed, however, because the JCT includes both
income and payroll taxes in the denominator in calculating the
percentage cuts, even though Congress is not changing payroll
taxes. A much better way to calculate income-tax cuts is as a
percentage of current income taxes paid, but neither TPC nor JCT
show the results that way.

So I recalculated the JCT results, and found that middle-income
groups would get by far the largest cuts as a percentage of current
income taxes. For example, households earning between $50,000 and
$75,000 would get a 24 percent cut in 2019, while those over $1
million would get just a 6 percent cut.

What about the Tax Foundation? The foundation has done yeoman’s
work on tax reform, generating timely runs of its simulation model
and supporting pro-growth reforms. But even its reports hide the
GOP’s big cuts for middle earners because it, like the TPC, shows
tax cuts as a percentage of after-tax incomes. Tax Foundation reports that the Senate cuts
would increase incomes 4 to 5 percent across the board including
the economic-growth effects, suggesting that the cuts are
equitable.

But they are not. To see why, consider that the top 1 percent earns 21
percent of all income but currently pays 39 percent of all
individual income taxes. As a result, a tax cut that reduced every
taxpayer’s burden by the same exact proportion — say, a
quarter — would boost after-tax income by a higher percentage
for the rich, simply because the rich pay a higher percentage of
their income in taxes to begin with. For middle and lower earners,
the opposite statistical effect occurs.

So while the Senate tax cut might look equitable measured
against each group’s income, the bill would actually make the tax
code more progressive. Higher earners will pay a bigger share of
the overall tax load if the tax cuts are passed and extended in
future years.

The JCT and TPC tables show similar patterns of tax cuts across
income groups until 2025, excluding the Obamacare reduction in
subsidies. After that, the Senate bill would end most individual
cuts, and policymakers would decide whether to extend them. But in
the near term, the GOP tax cuts heavily favor middle earners over
higher earners, at least relative to how much they currently pay in
income taxes.

I view that as a negative feature of the bill because the tax
code is already too progressive. But the Democrats will continue to
say the opposite, and they will push for repeal of the pro-growth
elements of the Republican legislation, pointing to high budget
deficits as an excuse.

So Republicans need to set the record straight on tax
distribution. They also need to cut spending and deficits, or else
everybody’s taxes will be going up as the growing budget
redistributes ever more earnings through the government.