This Is What a Real Middle-Class Tax Cut Would Look Like
If one takes the White House’s word for it, tax reform is all about a single goal—helping the middle class, not the rich.
Gary Cohn, the White House’s chief economic adviser, says the president’s tax cut is “purely aimed at middle-class families.” Steve Mnuchin, the Treasury secretary, promised Congress that tax reform wouldn’t benefit the rich. House Speaker Paul Ryan says the plan’s “entire purpose” is to lower middle-class taxes.
But the promises don’t fit the plan. As my colleague Annie Lowrey has written, the still-unfinished GOP policy would deliver half of its benefits to the top 1 percent, according to an analysis by the nonpartisan Tax Policy Center (TPC). Meanwhile, America’s poorest families would get a minuscule tax benefit—less than 1 percent growth in after-tax income. One in five Americans making the median household income would actually see a tax hike, particularly if they live in high-tax states and have lots of kids. (When Senator Rand Paul discovered this fact, he sharply criticized the plan on Twitter.)
Trump’s tax framework is even more friendly to the rich than George W. Bush’s famously regressive tax cuts. In 2008, the TPC estimated the distributional effects of several Bush tax cuts passed between 2001 and 2006. In the graph below, I’ve compared those results with the TPC-estimated effects of the Trump tax cuts.
The upshot: The Trump tax cuts are worse for low-income people, worse for the middle class, and better for the 1 percent (and 0.1 percent) than the tax cuts of the last Republican president. Alternatively, one could say that the Bush tax cuts were twice as generous to the middle 20 percent—and 20 percent less generous to the top 0.1 percent.
So, what would a government policy to help the middle class actually look like?
The most sweeping and effective ideas are also the most politically hopeless. These are proposals like a basic income for all adults or a child allowance for all Americans under 18. They have several benefits. First, they would dramatically reduce poverty. Second—and this is still up for debate—they could grow the economy by putting more money into the hands of cash-needy families. Third, universal programs should please conservatives, because they eliminate the implicit marginal tax rates that come with means-tested programs (i.e., when a raise disqualifies someone from receiving government welfare). But the downside of these programs is obvious, too: They could cost many trillions of dollars. The Trump tax plan could also expand the deficit by several trillion dollars, but it’s improbable that this Republican-controlled Congress would enact anything like a universal basic income.
Imagining a more realistic middle-class tax cut isn’t hard to do. It begins with the acknowledgement that tens of millions of households don’t owe the government anything through the federal income tax, because their incomes are too low. (Most still contribute payroll, state, and local taxes.) A good way for Washington to reduce these families’ tax burden would be to increase tax benefits, like the child tax credit and the Earned Income Tax Credit (EITC), which supplements the wages of lower-income workers and their families.
For example, Representative Ro Khanna has proposed a $1 trillion expansion to the EITC. The plan would give about 50 million households an average tax benefit of roughly $3,000; Americans earning more than $1 million would get nothing. In the graph below, the nonpartisan Center for Budget and Policy Priorities compares the distributional effects of a trillion-dollar EITC expansion versus Trump’s $6 trillion tax cut.
Such an EITC expansion would raise by 5 percent the after-tax income of households making less than $30,000. That’s 10 times more than what those households would get under the Trump tax plan. And the program would cost 67 percent less than the Trump tax cuts that go to the 1 percent alone.
The GOP could still revamp its blueprint to help the middle class. Republicans in Congress could reduce the bottom tax rate, expand the EITC, or introduce another benefit that would boost post-tax incomes for middle- and lower-income households. But the current framework does not specifically do any of that. However, it is rather specific about reducing the top individual tax rate (which Trump probably pays each year); about eliminating the Alternative Minimum Tax (for which Trump paid an extra $30 million in his last publicly available tax return); and about cutting taxes for closely held companies (just like Trump’s).
In short, the tax plan is, at best, vague about helping the people it is supposed to benefit and specific about helping people just like the president, for whom it is supposed to, in the words of the Treasury secretary, “hurt.”