America is about to find out just how much President Trump intends to help the “little guy.” In a matter of days, we’re supposed to get details about his tax plan, which is shaping up to be the biggest overhaul of the nation’s tax code since 1986.
The details released so far were weighted heavily against middle-class Americans. The White House released a one-page outline in April that showed massive tax cuts for corporations and the wealthy with no concrete way to pay for them. Trump campaigned on fixing America's debt. But the debt would increase by a whopping $7.8 trillion over the next decade, according to an analysis by the Tax Policy Center, a nonpartisan think tank. About half the benefits would go to the top 1 percent. Meanwhile, millions in the middle class would see their taxes go up.
But it’s not a done deal yet. Trump shocked a lot of people, especially on the Republican side, when he told reporters last week, “The rich will not be gaining at all in this plan.” And as The Washington Post reports, the White House is now — in a bid to win over Democrats — seriously considering shrinking tax cuts for the wealthy and keeping the estate tax in place, which is only levied on individuals who die with more than $5.49 million in their estate.
The details are still “very much up in the air,” says Michael Strain, director of economic policy studies at the right-leaning American Enterprise Institute.
If Trump didn't cut any taxes on the rich, the cost of his plan would shrink from $7.8 trillion to about $3 trillion, according to Tax Policy Center cost estimates. It helps free up money to what Trump claims his top priorities are: cutting businesses taxes to make the United States more competitive and giving the middle class a raise.
Strain is one of several Republicans The Post spoke with who predict the final deal will “have to include some Democrats.” A Democratic lawmaker actually introduced the bills for Ronald Reagan's 1986 tax reform package (Democrats controlled the House at the time), and the final vote was overwhelmingly bipartisan (74 to 23 in the Senate and 292 to 136 in the House).
Getting Democrats on board isn't just a political nicety. If Trump can't get any support from the left, he probably won’t get much more than a George W. Bush-style temporary tax cut, which did little to juice the economy. Companies are a lot more likely to hire people and build new factories if they know the tax cut is going to last for a long time, not just a few years.
The president has been aggressively reaching out to Democratic lawmakers lately. Even Mick Mulvaney, Trump’s ultraconservative budget director, now sounds open to working with Democrats. “I did get a feel there was a chance for a deal on taxes,” Mulvaney told CNBC last week after Trump and other top White House staffers (including Mulvaney) shared Chinese food with Senate Minority Leader Charles E. Schumer (D-N.Y.) and House Minority Leader Nancy Pelosi (D-Calif.).
Trump's tax plan is going to need a major makeover if he really wants to help his working class base and lure some Democratic votes. As the White House rolls out the next version of tax reform, keep an eye on two items: all the tax breaks for the rich and whether there's any mention of expanding two popular tax credits that only benefit mainly the working poor and middle class, the Child Tax Credit (CTC) and the Earned Income Tax Credit (EITC).
What happens with those items alone will reveal a lot about who Trump is prioritizing: the mega rich or the “just getting by.”
First, the goodies for the rich. Trump originally proposed slashing taxes for America's wealthiest families from 39.6 percent to 35 percent. But that's not all. Many of his other tax cuts, which come with hefty price tags, would exclusively benefit top earners like him.
He wants to get rid of the estate tax, which is sometimes called the “death tax” because it's a tax assessed when someone dies and passes a property to a relative or friend. It only applies to properties worth $5.49 million or more. He also plans to eliminate the small 3.8 percent tax on investment income that was put in place under the Affordable Care Act, also known as Obamacare, that only applies to people making more than $200,000 a year ($250,000 for married couples).
He also calls for axing the alternative minimum tax, a mechanism put in place in the 1970s to prevent the rich from dodging taxes by taking too many write offs. It only applies to people making more than $120,000 a year. And he wants to make it easier for people who run their own businesses — often called “pass through entities” — to be taxed at a much lower rate (15 percent instead of 39.6 percent). This is often touted as helping “average Joe” small business owners, but that's a fallacy. Nearly 70 percent of the benefits would go to households with incomes over $1 million, according to the Center on Budget and Policy Priorities, a left-leaning think tank.
“Small businesses get used as a smokescreen to help the wealthy,” says John Arensmeyer, head of Small Business Majority, a network of 55,000 small-business owners. He says the proposed change would mainly help hedge funds and celebrity consultants.
All of these tax breaks together cost over $4.5 trillion — more than half the total price tag of the bill, according to Tax Policy Center calculations. Is Trump willing to reverse course on any of these goodies?
Second, watch what Trump does with the child tax credit (CTC) and the earned income tax credit (EITC). These weren't even mentioned in the April one-page outline, but they could make a big difference to Americans barely getting by. “Trump’s tax plan does so little for the working class in large part because it ignores the parts of the tax code that are best designed to support that group: refundable tax credits like the Earned Income Tax Credit and Child Tax Credit,” says the Center on Budget and Policy Priorities.
Republicans like to tout how they are lowering tax rates for everyone, but more than 45 percent of U.S. households don't pay federal income taxes. Slashing rates doesn't help them because they already owe $0. The way to aid the lower middle class is refundable tax credits, which means the working poor get a small amount of money back from the government.
Refundable tax credits like the CTC and EITC have enjoyed bipartisan support in the past because they reward work and alleviate poverty. People only get the money back on their taxes if they have a job and earned some money that year.
The CTC and EITC have also done exactly what they were intended to do: lift millions of people out of poverty. The latest report on poverty in America from the U.S. Census Bureau came out last week. It showed that refundable tax credits lifted 8.2 million Americans out of poverty in 2016, making the credits the second-best poverty reduction program in the United States after only Social Security.
It's telling that liberal groups like the Center on Budget and Policy Priorities and conservative think tanks like the American Enterprise Institute support doing more with the CTC and EITC.
“The EITC is a subsidy available only to households with jobs, and the amount of the subsidy rises with every additional dollar of earnings over an initial range,” Strain of AEI wrote in a recent Bloomberg op-ed that argued in favor of a tax package that cuts corporate rates and expands the EITC.
At the moment, Strain says a single guy earning minimum wage only gets $40 a year back from the EITC. A CBPP analysis says the average EITC check for a family without children is $293, compared with more than $3,100 a year for a family with children. Last week, new census data came out showing that American males, including some without kids, earn the same today as they did in 1972. If Trump wants to give working people a raise, bumping up the EITC for people who don't have children would be an easy way to do it.
While the EITC hasn't gotten much attention, Strain says there is “intense interest” on the GOP side to raise the CTC, which is worth up to $1,000 per child. Ivanka Trump and Sens. Mike Lee (R-Utah) and Marco Rubio (R-Fla.) are leading the charge. Lee and Rubio have been pushing a plan for the past several years that would increase the CTC to $2,500 per child.
The $2,500 credit would be refundable against both federal income taxes and payroll taxes. Payroll taxes come right out of a person's paycheck to pay for Social Security and Medicare. The Tax Policy Center says 60 percent of the people who pay $0 in income taxes still pay payroll taxes, which is why the Lee and Rubio plan could make a difference for a lot of the working poor.
Of course, any policy change costs money. The Tax Policy Center estimated the bigger CTC would cost $1.5 trillion over the next decade and an expanded EITC would be another $1.4 trillion. Even with those price tags, expanding the EITC and CTC would cost a lot less than the tax breaks Trump initially proposed for the rich.
It's about trade-offs and who should get the bulk of the benefits.
Trump told the Wall Street Journal in July, “The people I care most about are the middle-income people in this country who have gotten screwed.” In Trump's tax plan, the middle class will find out how much that “care” is worth.