President Trump and Republicans in Congress are accelerating their efforts to overhaul the American tax system. Last week, the Senate passed a budget bill that will allow it to approve the overhaul proposal without the threat of a Democratic filibuster. It’s a complex situation, overlapping the endlessly complicated tax system with the hard-to-parse rules that govern congressional action. It’s also early in the process, but Republicans hope to move quickly to limit opposition.
There are, however, already three rhetorical points that are worth addressing given that each will come up repeatedly as the still-nebulous proposal makes its way through Congress.
Your income probably isn’t going to go up by $4,000.
White House press secretary Sarah Huckabee Sanders highlighted this argument Monday on Twitter.
New report: lowering the corporate tax rate from 35% to 20% = average pay raise of $4,000 annually per householdhttps://t.co/UtDdZ0iSUZ
— Sarah Sanders (@PressSec) October 23, 2017
It’s a compelling point: Who wouldn’t like to see an additional $4,000 a year in pay? There are a few caveats, though.
The first is that it’s not an average pay raise per household — it’s an increase in average household income. That’s an important distinction.
According to the study Sanders links, the average American household earned $83,143 in income last year. This corporate tax cut (again according to the study) would mean an estimated increase to $87,520. But, as you may remember, the average can be skewed by people making exorbitantly high incomes. If you have a group of 10 people, nine of whom make $20,000 annually and one of whom makes $650,000 a year, the average income is $83,000. To increase the average income to $87,000 a year, you can give the nine $20,000-a-year earners an increase of $500 — and the guy making $650,000 an increase of $40,000 a year. The effect is the same as what Sanders is celebrating: An increase to the average income of $4,000 a year. (Or, at the higher end of the estimate, $9,000.)
The median average income, on the other hand, would see an increase of only $3,000, according to the report. The median income — the income at which half of the country’s household incomes are higher and half lower — is about $59,000 a year. The corporate tax cuts would bring that to $62,147, according to the study. Notice that when we’re considering a lower number, the increase is lower. If you make under $59,000, you wouldn’t see an increase in your salary of $4,000 each year; the less you make, it’s safe to say, the less you’d see added.
We keep saying “according to the study” because that study, from Trump’s Council of Economic Advisers (CEA), is not the final word on the subject. It relies on one particular set of data that, as former Treasury secretary Lawrence Summers wrote for The Post on Sunday, is not universally agreed upon (to put it charitably).
“During my years in government, I served with 7 CEA chairs — Martin Feldstein, Laura Tyson, Joe Stiglitz, Janet L. Yellen, Martin Baily, Christy Romer and Austan Goolsbee. I observed all of them fighting with political figures in their Administrations as they insisted that CEA analysis had to be of a kind that would be respected and validated by outside economists,” Summers wrote. “. . . I cannot imagine any of them releasing an estimate as far from the professional mainstream as $4000 to $9000 wage increase from a corporate rate cut claim.”
The CEA report assumes among other things that incomes will go up after a corporate tax cut because they go down after a corporate tax increase. Vox has a good rundown on what others say the likely effects would be.
The rich would definitely benefit from the proposal.
On Sunday, Axios reported that the final bill might exclude millionaires from receiving an income-tax cut, a proposal that would go a long way to bolstering the administration’s case that it isn’t the top earners who are receiving the benefits of the proposal. As it stands, it very much is.
The problem with that proposal, as one Trump administration official said anonymously to Axios’s Jonathan Swan, is that Trump “believes [rich Americans] don’t care that much about the individual rate so long as they get all the other goodies, like the corporate rate and expensing.” In other words, the amount the wealthiest Americans would save from an income-tax decrease pales next to the savings they’ll see from other parts of the law anyway.
The Atlantic’s Derek Thompson pointed out that a cut to “pass-through” tax rates — taxes on income that flows from certain types of businesses to their owners — would be much more beneficial. A report from the Center on Budget and Policy Priorities (CBPP) estimates that the proposal to cut the pass-through rate would amount to a 5 percent increase in after-tax incomes — more than $114,000 on average. Or, about twice the median annual household income in the United States.
There are other goodies for the wealthy, too: An end to the alternative minimum tax, one of the vehicles that we know has cost Trump himself dearly in past years. An end to the estate tax. No increase on capital gains. Excluding millionaires from the income tax cut would hardly mean that millionaires don’t see any benefit.
The tax cuts probably won’t pay for themselves.
Senate Majority Leader Mitch McConnell (R-Ky.) was the most recent advocate for the proposal to make this case.
Senate Majority Leader McConnell says the growth from the GOP budget will offset its impact on the national deficit https://t.co/O8WNVtlKia
— CNN Politics (@CNNPolitics) October 22, 2017
The idea is this: By cutting taxes, the economy will grow so much that the estimated $1.5 trillion increase to the deficit will be largely offset as people earn more and pay more in federal taxes on their new, higher incomes (among other things). In the late 1990s the federal deficit was erased as the economy soared; the idea is to get the economy to soar again, with the same result.
Members of the administration (including economic adviser Gary Cohn) have argued that the full amount of the cuts will be offset by growth. This is the same case that was made for the tax cuts signed into law under President George W. Bush more than a decade ago. “The president’s package will generate new growth, it will expand the tax base and thus increase tax revenue to the federal government ultimately,” Vice President Richard B. Cheney said in 2003.
That doesn’t appear to have happened. “Despite promises from proponents of the tax cuts, evidence suggests that they did not improve economic growth or pay for themselves, but instead ballooned deficits and debt and contributed to a rise in income inequality,” the CBPP wrote in updated analysis released Monday. It’s tricky to analyze the effects of such cuts, as the Treasury Department itself noted in a 2004 report. (That report found that revenue had declined following the 2001 cuts Bush enacted.)
McConnell, in his comments, didn’t say the whole projected deficit would be offset by growth. But others in his party seem indifferent about an increase to the deficit. Rep. Mark Walker (R-N.C.) gave a remarkable quote to the New York Times to that end.
“It’s a great talking point when you have an administration that’s Democrat-led,” he said. “It’s a little different now that Republicans have both houses and the administration.”
That, too, is a slightly different case than the sale pitches for the Trump bill might suggest.