Trump's tax proposal won't actually help the middle class. Here's what would.
President Trump campaigned on helping the little guy. His latest tax proposal, he says, is about helping the middle guy.
“It’s a middle-class bill,” Trump promised an audience of truckers last week.
Other administration officials and House Speaker Paul D. Ryan (R-Wis.) have also claimed that their primary objective in reconfiguring the tax code is to help the middle class, not the wealthy.
Unfortunately, they seem to have gotten things backward.
In a preliminary analysis, the nonpartisan Tax Policy Center estimated that 80 percent of the proposed tax cuts would go to the top 1 percent of earners over the next decade. Meanwhile a quarter of households in the middle quintile would see their tax bills rise.
This should be no surprise, when you consider what’s in the Republican framework.
It cuts the top personal income tax rate; eliminates estate taxes, which currently befall only estates worth at least $5.5 million; kills the alternative minimum tax; and slashes rates on pass-through income. The White House has lately even made the absurd claim that its enormous, unfunded corporate rate cuts are primarily about helping the middle class.
On Monday, the president’s Council of Economic Advisers released a report claiming that corporate tax cuts would boost the average household’s income by at least $4,000. This estimate relies on a series of assumptions that seem dubious at best, given other research (including one recently deleted paper by Treasury’s own staff economists).
All this made me wonder: What would a tax plan that actually prioritizes the middle class look like?
Not much like the one Republican leadership cooked up, but it could still include elements appealing to both parties.
A real middle-class tax plan would likely include a large expansion of the earned income tax credit.
For decades the EITC has supplemented lower-income people’s pay through a tax refund. It’s pro-work, because it increases the payoff from holding down a job. It also meaningfully improves working families’ living standards.
Given these selling points, the EITC has historically enjoyed support from both Republicans and Democrats. In recent years, both Ryan and President Barack Obama proposed making it more generous to workers who don’t have custody of a minor child.
Curiously, though, the current GOP framework says not a peep about this powerful tool.
Fortunately, there’s an (admittedly expensive) off-the-shelf policy available: a Democratic plan to expand EITC eligibility up the wage ladder, to households making as much as $76,000 depending on family size. The legislation would also roughly double the maximum size of the EITC for working families and almost sextuple it for childless workers.
These expansions are designed to help middle-income workers “reclaim” the pay they would have received had there not been decades of wage stagnation, the House bill’s primary sponsor, Rep. Ro Khanna (D-Calif.), told me in a recent interview.
Khanna also observed that expanding the EITC is a much more direct way to raise middle-class families’ earnings than some Rube-Goldberg-like corporate tax-code machinations.
“Trump is saying he’s going to cut the corporate tax rate in order to raise your wages,” Khanna said. “I’m saying: Let’s just raise your wages.”
We could also help middle-income families by expanding the child tax credit.
The GOP tax plan does include an expansion of this credit, to be sure. But what they’ve announced so far doesn’t do much for the middle class.
That’s because the expansion appears to be non-refundable (meaning it primarily helps higher-income filers), and it mostly serves to offset the framework’s elimination of personal exemptions, explains Tax Policy Center researcher Elaine Maag.
Other more generous expansions would be possible though, including a version pushed by Republican Sens. Marco Rubio (Fla.) and Mike Lee (Utah).
What about the corporate tax code?
There are some changes that could arguably boost growth and productivity, some of whose benefits could (ahem) trickle down to workers. Cutting rates and eliminating distortionary loopholes could be helpful — which is why Democrats previously said they’d support such a plan.
Only, though, if the plan were revenue neutral.
A revenue-negative plan most likely hurts growth in the long run, as Obama’s former chief economist Jason Furman points out. More important, someone eventually has to cover the cost of unfunded tax cuts through some future combination of higher taxes and lower spending. Lower spending almost certainly would disparately hurt lower- and middle-income families.
Which is why the best thing elected officials can do to help the middle class would be to make sure any promised benefits are adequately funded. Which would mean raising rather than cutting tax revenue.
Something tells me that’s not what Republicans have in mind here.