Get ready for tax cuts for the wealthy.
The guiding principle of the tax plan that President Trump’s administration and top Republican leaders in Congress have spent months crafting appears to be tax cuts for all, even if they add $1.5 trillion to America’s already sizable $20 trillion debt.
Trump promised this is “not a plan for the rich” only a few days ago, but leaked details of the tax plan contradict that. What we know so far is this is a deal where most of the benefits go to the wealthy and large corporations. Many economists say it won't even do much to boost economic growth.
The top rate for the wealthiest Americans — the rate on any income above $418,000 a year — will fall from 39.6 percent to 35 percent, according to a report from Axios confirmed by The Washington Post. That alone could kill any Democratic support for the bill. It could also hurt Trump. He campaigned as a populist who would fight for the little guy, a message he has continued to push in the White House.
Trump is set to give a speech Wednesday in Indiana to sell the deal to the American people. With Trump, nothing is final until it's on paper and he actually signs off on it. In the past 24 hours, he's already made statements contradicting leaked details of the so-called tax deal with House and Senate Republican leaders.
The bottom line is the plan isn't sounding very populist. Republican leaders insist there's more to come. As the Post reports, Trump and Congress are looking for ways to limit the windfall for the wealthy, especially mega-rich hedge fund managers, a group Trump once said are “getting away with murder.” So far, they haven't released any specifics on how they'll do it.
Without major changes, this deal is looking more and more like traditional “supply side economics,” the theory that tax cuts for the top help everyone else, because the wealthy supposedly turn around and spend and invest more. After decades of stagnating wages (especially for men) and rising inequality, Americans are growing skeptical of this approach. It didn’t work in Kansas, and most economists predict few economic gains from this latest attempt.
Goldman Sachs put out a report last week saying the tax plan would only add 0.1 percent to 0.2 percent to America’s economy in 2018 and 2019, far less than the extra point of growth the White House has been predicting. The National Association for Business Economics, a group that tends to lean to the right, has a similar prediction: Only 0.25 percent extra growth in 2018 from Trump’s tax package.
“We’re really talking about a small boost to the economy if tax reform does go through,” says Gregory Daco, chief U.S. economist at Oxford Economics, who participated in the NABE survey out today.
Economists say most of the gains from the tax deal that’s taking shape will come from lowering business taxes. Leaked details over the weekend indicate the top corporate tax rate will fall from 35 percent to just 20 percent. The catch is, the lower the rate goes, the more money the government loses.
Trump wanted it even lower: 15 percent. Over the weekend, he told reporters he hasn’t given up fighting for that yet. “We’ll see what happens, but I hope it’s going to be 15 percent,” Trump said Sunday while preparing to board Air Force One.
Regardless of how low the rate goes, big businesses are going to be thrilled.
“Fifteen percent would be terrific,” said Joshua Bolten, president and CEO of the Business Roundtable, a business lobby that represents many of America’s largest companies. “But it does not have to end up at 15 percent for Business Roundtable companies to be happy about it.”
So what about the middle class? The wins for the rich and big business are already pretty clear. The picture for the middle class and small business owners is a lot murkier.
We don’t know yet what the rates will be for the middle class — or what deductions will go away. An analysis over the summer by the Tax Policy Center, a nonpartisan think tank, found that about a quarter of middle-class households (those earning between $49,000 to $86,000) would see their tax bill rise under the plan, especially if popular deductions go away like the mortgage interest deduction and the state and local tax deduction.
Trump keeps arguing that lower corporate tax rates will be the biggest benefit of all for working people because they will usher in more jobs and more money. Conservative think tanks have been backing up those claims.
“Any reduction in the corporate tax will ultimately be passed on to workers,” says Adam Michael, a tax policy analyst at the conservative Heritage Foundation.
Just about everyone agree something needs to be done to stop U.S. companies from going relocating overseas to lower their tax bills. But it’s questionable whether slashing corporate tax rates will actually spur companies to use the extra cash on hand to pay workers more. That didn’t happen after the 1986 tax revision under President Ronald Reagan. Weekly wages for rank and file types (non-managers) barely budged in the years that followed, according to data from the Labor Department.
It’s also notable that the leaks indicate the top rate for small business owners (the “pass through rate”) would fall from 39.6 to 25 percent. It’s a sizable cut, but it means small businesses would still be paying more than American’s biggest corporations, which might not sit well with voters.
If Trump and GOP lawmakers really wanted to help working people, they would need to do more than simply lower the rates. More than 45 percent of Americans, including many working poor, won't benefit from rate cuts because they don't earn enough money to owe any federal income taxes.
Trump’s daughter Ivanka and GOP senators such as Marco Rubio (R-Fla.) have been pushing the expansion of refundable tax credits like the Child Tax Credit and Child and Dependent Care Credit to ensure the working poor get some benefit from this tax deal, too. Refundable tax credits allow families who work but don't owe federal income taxes to get a small amount of money back from the federal government. Without actions like that, a lot of lower middle class workers aren’t going to get anything in this tax plan.
Instead of going with the “Ivanka option,” GOP leaders appear to be opting to expand the standard deduction. They want to double it from its current rate of $6,350 for singles and $12,700 for married couples. That sounds great, except that it's not refundable, so it won't help Trump's working class base.
Much could change before Trump takes the podium on Wednesday, but so far, this does not look like a win for the middle class, especially the lower middle class.