The House Republican tax bill has been sold as “reform” for all Americans, especially the middle class–but really it isn’t. Mostly it’s reform for a few very rich Americans, and, if enacted into law, it’s likely to exacerbate the already galloping problem of income inequality, say tax experts.
Wages among the majority of workers have stagnated since the mid-1970s. Between 1979 and 2016, the bottom fifth of the scale actually saw its incomes fall, adjusting for inflation. The top fifth, meanwhile, saw its income rise from an average of $38 per hour to $48 per hour–a 27% jump. The 1%’s share of total income has doubled since mid-century, returning to levels not seen since the 1920s.
Economists give various reasons for this shift, including globalization and automation, which made it easier for companies to offshore manufacturing or do without humans altogether. Other factors are more political. Unions have declined, reducing the power of workers to negotiate wage increases. And many new laws have favored the owners of capital, widening the gulf between those who rely on wages for a living and those who get their money from investments. For example, in 2003 Congress reduced the tax rate on stock dividends from 35% to 15%.
The latest tax cuts further the trend of the last few decades, only perhaps in more dramatic fashion. Not only will they continue to benefit people with financial assets. They will also let the wealthiest keep more of their holdings when they die, perpetuating cycles of inequality between generations.
“Trump’s campaign was all about these forgotten working class people. One would expect that in a bill where you have $1.5 trillion to allocate, that something would be done for these people. But when you look at it, there’s just very little,” says Chuck Marr, director of federal tax policy at the Center on Budget and Policy Priorities (CBPP), a progressive think tank.
Of the $1.5 trillion in proposed cuts in the House version of the bill, about $1 trillion will go to corporations and businesses over the next decade. About $500 billion will go to individuals. Of that second amount, the top-1% of earners will get 31% of revenue in 2018 and 48% by 2027, according to the Institute on Taxation and Economic Policy. A quarter of middle-scale earners will actually pay more. In fact, the total value of tax increases is roughly equal to the amount going to the top-1%, according to the CBPP.
A poster child for the Tax Cuts and Jobs Act (TCJA) might be a rich heir who doesn’t work for a living, says Marr.
The bill reduces and eventually eliminates the estate tax at a cost of about $200 billion over a decade. That helps only about 5,200 families a year. If heirs hold an asset–say, a house–without selling it, they’ll never have to pay tax on it. The capital gain will be “unrealized” and there will be no taxation when the asset is passed on to their heirs–creating an intergenerational perfect circle. The bill forgives all taxes on capital gains when someone dies. That means Bill Gates or Warren Buffett never has to pay a cent on what they own, providing they don’t sell an asset.
Meanwhile, the bill also reduces taxes on so-called “pass-through” businesses, including partnerships and sole proprietorships, from 39.6% to 25%. That will incentivize higher earners, including corporate executives, to set themselves up as small businesses. As individuals, they would normally be taxed up to 39.6% on salaries over $1 million a year. Going forward, they could get the 25% rate if they persuade employers to pay their incomes into proprietorships. Businesses will likely be able to maintain a federal deduction on state and local taxes. Individual taxpayers are set to lose that under the bill, as Republicans seek to offset deficits by raising other income.
At the same time, the bill does little to help the large numbers of people who rely on wages for a living, Marr says. For example, there are no cuts to payroll taxes and no expansion to the Earned Income Tax Credit (EITC)–probably the most effective program in the public assistance budget.
About 26 million low-income Americans received EITC payments last year (to an amount equal to a percentage of their earnings) worth an average of $2,400. There have been calls from both Democrats and Republicans to expand the EITC to include more groups, including individuals without children. In fact, a late tweak in the bill tightens the EITC’s eligibility requirements, which could reduce the number of people who claim it.
Inequality isn’t just a moral issue. Wage stagnation is bad for economic growth because it reduces the spending power of people most likely to spend their income, economists say. People with higher incomes tend to spend less of their money, proportionally speaking. The International Monetary Fund has said we could raise taxes on the rich without affecting economic growth overall.
The Republican plan maintains the top rate at 39.6% (for incomes over $1 million). But it leaves in place ways for individuals and corporations to reduce or evade taxes altogether. The bill does nothing to stop the loss of billions of dollars in taxable wealth offshore.
Moreover, the bill will result in a loss of government revenue that can only be closed by cutting spending in other areas, Marr says. Republicans say their proposal will result in a net reduction in tax revenue of $1.5 trillion, which they make up by ending tax deductions and other giveaways. For example, the bill limits the Mortgage Interest Deduction on new homes, ends federal credits for electric vehicles, and stops a deduction for adopting children (among many other changes). But the deficit could be larger if economic growth doesn’t increase the number of people paying taxes to compensate for the shortfall.
The Tax Policy Center predicts the tax cuts will actually reduce federal revenue by $2.4 trillion over the next decade. If so, that could put pressure on Medicare, Medicaid, and other public assistance budgets, Marr says. The CBPP says the tax plan could raise the amount of public debt rate relative to GDP by 8%, forcing lawmakers to make further spending cuts.
“If you look ahead, there are these fiscal pressures because the baby boomers are going to be going deeper and deeper into retirement. That puts a burden on Social Security, Medicare, and health costs,” Marr says. “The debt is already elevated historically and then you add on to it. Soon you’ll hear, ‘Oh, now we have to cut Medicare and Medicaid.'”
It’s hard to see how the Republican tax proposals do anything other than widening the already wide problem of income inequality. In fact, ending the estate tax just perpetuates it indefinitely.