One of the most unfortunate and misleading myths in fiscal politics and policy since Ronald Reagan is that tax cuts are, at worst, costless and, at best, a boon to growth. They are, in this mythology, not just a free lunch but also one that comes with endless bags of free groceries.
This trickle-down sales job is very much upon the land, as the Trump administration and its allies are busy trying to convince the public that their tax plan, which appears to feature cutting the corporate rate by more than half and opening up an expensive new loophole for hedge fund managers and investment bankers, would help the middle class and the poor.
In the real world, as the Kansas legislature recently learned the hard way, tax cuts lose revenue and, thus, sooner or later lead to spending cuts. That means that to understand the winners and losers of any tax proposal, we must consider not just the tax impacts — who gets a tax cut? — but also the effects of how the cut is ultimately paid for.
Thankfully, analysts from the Tax Policy Center did just that with President Trump’s tax plan (as we understand it). They first asked the traditional question: How much of the tax cut goes to different income groups? We’ve seen that analysis of Trump’s plan before, and although the vast majority of the cuts go to the richest households (e.g., slightly less than half to the top 1 percent; 6 percent to the middle class), most households end up with reduced tax liabilities.
But then the TPC’ers ask a new question. Sure, you can load them onto the deficit for the time being, but, eventually, tax cuts will be paid for with either tax increases or spending cuts (or some combination of both). Republicans have already shown, in both the health-care debate and in their budget plans, that their preferred way to offset the tax cuts is by cutting spending — tax increases are verboten — on poor and moderate-income families. See their proposals to cut Medicaid or their budgets that cut low-income programs by more than a third.
I’ll get to the numbers in a moment, but this new analysis shows regressive tax cuts — cuts that disproportionately favor the wealthy — to be even more regressive than we thought. In round one, they deliver far more money to those at the top of the scale. In round two, given today’s Republicans’ spending priorities, they take far more away from those at the lower end of the scale.
The first figure below starkly portrays this double whammy. The bars on the left for each income group show the share of households with tax cuts before accounting for any offsets (spending cuts or tax increases). Though their average tax cut is $100, about two-thirds of low-income households get a tax cut under Trump’s plan.
But when the TPC assigns the cost of paying for the tax cuts equally to every tax unit, the share of low-income households with tax cuts goes to zero. For the middle class, paying for the tax cuts takes the percentage of beneficiaries down from 75 percent to 6 percent. For the top 1 percent, the change is imperceptible. The likely pay-fors in this scenario would barely touch the richest Americans.
The next figure makes a similar comparison for the percent change in after-tax income by income class. Before accounting for pay-fors, bottom-fifth income gets a very slight nudge (0.3 percent); middle-class after-tax income goes up 1.3 percent. After pay-fors, those numbers flip to -16 percent and -3 percent. Again, the top 1 percent — average income $2.3 million — is essentially unaffected.
Two caveats to these findings. First, if the Republicans succeed in passing a tax cut, it may not be paid for initially, meaning the deficit will go up. Second, the TPC shows three ways of accounting for the eventual pay-fors, and the one I’ve chosen is the most regressive. The other two still end up boosting high incomes more than low incomes but much less than what I’ve shown in the second figure. For example, under the least regressive offset scenario the TPC analyzed, the tax cuts lead to no income changes for the bottom and middle groups and an increase of 3 percent for the top 1 percent.
However, I strongly suspect that Republican pay-fors would be significantly more regressive than even the most regressive scenario the TPC analyzed. That’s because the TPC assumes the pay-for would comprise some combination of tax increases on higher-income households and spending cuts on lower-income households. As noted above, that would be a departure from the rest of their proposals, which almost uniformly whack the poor and the middle class while helping the rich. I could be wrong, but I have a hard time seeing this or future Republican Congresses raising taxes later to pay for their tax cuts now.
If you don’t believe me, go back to 2012, when the George W. Bush tax cuts were supposed to “sunset,” and remember how loudly Republicans protested President Barack Obama’s proposal to allow that to even partially occur. I’ll give you the longest odds you want that once their unpaid-for tax cuts increase the deficit, their response will not be “Bummer, we’d better raise taxes now.” It will be: “Oh, no! The deficit’s going up; quick, cut spending on the safety net, education, job training and health care!”
Finally, there’s another long-term cost that’s not accounted for in this analysis. As Arloc Sherman and Tazra Mitchell show here (better yet, listen to this podcast featuring their work), disinvesting in low-income children has long-term costs, as some of these children will have worse health, education and employment outcomes against a scenario in which programs that support their well-being are amply funded.
There is simply no good rationale for these tax and spending cuts. America has big problems right now, no question, but they are not that rich people have too little and poor people have too much. Yet, that is the problem this even-more-regressive-than-I-thought tax proposal is trying to solve.