Understanding the Republican Tax Plan
The non-partisan Tax Policy Center reports that the Republican tax plan will increase the federal deficit by $2.4 billion over the next ten years and then another $3.2 billion over the following decade. Over the first decade, it would reduce business taxes by $2.6 trillion, eliminate estate and gift taxes for the extremely wealthy by $240 billion and increase individual income taxes by $470 billion.
The very wealthy get the lion’s share of the individual tax breaks. In 2018, taxpayers in the top 1% (incomes over $730,000 annually) get 50% of the individual tax breaks. By 2027 they receive 80% of the benefits of individual tax breaks.
What’s in the proposed package for individuals? For individuals, the alternative income tax would be repealed, the seven income tax tiers would be compressed to three (12, 25 and 35%), the standard deduction would be increased to $12,000 for an individual and $24,000 for joint filers, the child tax credit would be increased as would be the deduction for non-child dependents. To offset the costs of some of these tax breaks, all personal exemptions would be repealed; most itemized deductions (except mortgage interest and charities) would be repealed; other unspecified exemptions, deductions and credits would be repealed, and the cost of living adjustments in tax brackets and deductions would be reduced. The estate and gifts tax for couples with over $11 million in assets at the time of their deaths would be repealed as well.
Who gets the benefits? The top 0.1% would get tax breaks equal to $723,000 in 2019 and $1,022,000 in 2027. The top 1% would get tax breaks equal to $129,000 in 2018 and $207,000 in 2027. The top 20% would get 75% of the benefits of the tax breaks in 2018 increasing to 87% in 2027. The bottom fifth of tax payers gets an average tax break of $60 in 2019 and $50 in 2027. The second fifth of tax payers gets a tax break of $290 in 2019 and $230 in 2027. The middle fifth of tax payers gets a tax break of $660 in 2019 declining to $420 in 2027. The fourth quintile of tax payers gets a tax break of $1,100 in 2019 declining to $450 in 2027. The top fifth of tax payers gets an average tax break of $8470 in 2019 and $10,610 in 2027.
By 2027 there are tax winners (they pay less taxes) and losers (they pay more taxes) at all levels of income. Among the top 0.1%, 97% are winners, and 3% are losers. Among the top 1%, 90% are winners and 10% are losers. Among those in the 95 to 99% percentiles of income distribution, 60% are big winners and 40% are smaller losers.
The distribution then changes. Between 90 and 95%, 38% are winners and 60% are losers; their amount of individual tax relief and increased tax burden are roughly equal. Between 80 and 90%, 41% are winners and 58% are losers; the amounts of individual tax relief and increased tax burden are roughly equal. Between 60 and 80%, 67% are winners and 33% are losers; however those with increased tax burdens pay substantially more than those getting tax relief will receive. Between 40 and 60%, 70% are winners and 28% are losers; the amount of individual tax relief and increased tax burden are roughly equal. At this point and lower on the income scale, the amount of tax relief is minimal -- equal to 0.5% of income or less. Whereas for the top 1% and top 0.1%, the amount of tax relief is 9% and 10% of income respectively. Despite what the President may have said about benefits to the middle class, this non-partisan analysis shows that by 2027, 80% of the benefits of individual tax reform goes to the top 1% of the income earners.
What will each of these changes cost over the ten years? Repealing the alternative minimum tax costs $440 billion over the next decade. Moving to three tax rates (15, 15 and 35%) costs $1.170 trillion. Increasing the standard deduction costs $830 billion while increasing the child credit costs $270 billion. To counteract these revenue losses, the Republican plan eliminates deductions: personal exemptions ($1.58 trillion), state and local taxes deduction ($1.3 trillion), most other itemized deductions ($175 billion), and changing to the chain-weighted CPI ($125 billion).
What’s in the business tax reforms? It’s important to understand that corporate income tax cuts are the bulk of the Republican tax reform package -- $2.6 trillion in the first decade. The provisions include: reduce the corporate income tax rate from 35% to 20%, reduce the pass-through tax rates to 25%, allow full and immediate expensing of new investments in depreciable assets, partially limit the ability of corporations to deduct net interest, repeal the domestic production activities deduction, repeal other unspecified special deductions and exclusions and adopt a territorial system of taxing foreign source income combined with a one time tax on un-repatriated foreign income.
The losses in tax revenue are substantial: reduce the corporate income tax rate to 20% ($1.99 trillion), pass through tax rate of 25% ($770 billion), full and immediate expensing of equipment ($192 billion), territorial tax system ($90 billion). There are very few offsets: repeal certain business tax expenditures ($232 billion) and one time repatriation tax ($161 billion). The increase in the deficit over the first ten years is $2.6 trillion and over the next ten years an additional $4.1 trillion.
Repeal of the estate and gifts tax adds an additional $239 billion to the deficit over the first ten years and $443 billion over the next decade. President Trump’s children will appreciate this aspect of the proposal.
Three Pinocchio’s The Trump Administration said there would be no increase in the budget deficit from tax reform, that it would not decrease taxes for the wealthy and that it would entail large tax cuts for middle income Americans. Not a single one of these claims is true according to this recent non-partisan analysis. In fact, they are so very far from truth (180 degrees from the truth) as to be utterly laughable, but for the fact they are the talking points for this proposal.
Assessment. So why would this be a good or bad idea when the economy and stock markets are perking along? Why would we want to add dramatically to the deficit in relatively good economic times? That is likely to be harmful to the economy by promoting inflation.
The case for a simpler corporate tax code is to avoid the perverse economic incentives favoring and disfavoring particular industries. This would be a good policy if it were deficit neutral and policy positive. Oil and gas and real estate and sugar cane industries have been particular beneficiaries of Congressional tax writer’s largesse. Large tech companies are much less so. It would be a good thing to level these playing fields and then assess and prioritize where we really want the economy to grow – like sustainable energy.
Another case for cutting corporate income taxes are that American multi-national companies are domiciling and parking their profits overseas to avoid their American tax liabilities. Ireland and other countries have made themselves into corporate tax shelters. We do need to address this particular issue, and a race to the bottom is a simplistic but the wrong answer.
Rural communities and rust belt towns are being left behind as the fastest economic growth is centered in big cites and along the coasts. We may want to use the tax code to encourage economic growth in communities being left behind.
I’ve been unable to identify any sound economic rationale for cutting tax rates for the very wealthy at a time when income inequality is at an all time high and has been rapidly rising for over four decades. In fact, the economic case is more readily made to close tax loopholes for the super wealthy by keeping and expanding the alternative minimum tax and reinvesting the revenues in much needed hard and soft infrastructure that would raise the nation’s productivity immensely. This aspect of the proposal is an unvarnished appeal to the party’s biggest donors; “we’ll ram through a cut in your tax rates even in the face of all evidence that this is a bad and unsustainable policy”.
In the debate about repealing and replacing the Affordable Care Act, many Republican senators spoke in support of a new federalism where states would experiment in different forms of health care delivery. Why then would you then turn around and propose to eliminate deductions for state and local taxes in this proposal? Is this simply designed to punish and deter the states seeking to help their own citizens?
It is unclear what happens to the medical expense deduction in this proposal, but why would you propose to eliminate the medical expense deduction at the very time as you are proposing to make many more Americans uninsured and/or insured for fewer services?
The design of the proposal appears to be conceived as a well-meaning gift of public funds to the party’s largest donors before the next election cycle. Why not sit down with the opposition party and frame tax and economic policies that help those being left behind in Appalachia, the rust belt and rural America? Show some wisdom and ability to govern, don’t succumb to the very worst instincts and self interest of your donor base.
Prepared by: Lucien Wulsin