(Bloomberg) -- President Donald Trump’s surprise call to cut middle-income families’ taxes by 10 percent could mean top earners get a break, too.
It’s still unclear how Trump will propose to reduce the tax burden on middle-class Americans, but one of the most straightforward ways would be to lower rates by 10 percent for single filers making up to $82,500. U.S. income tax rates are graduated and income dollars get taxed in chunks as they move up through the brackets -- which means wealthy Americans would also get to apply the reduced rate on their first dollars of income.
“A millionaire gets the same size tax cut,” said Kyle Pomerleau, an economist at the conservative Tax Foundation.
Such a move would undermine the president’s last-ditch effort to appeal to middle-class voters before they head to the polls on Nov. 6. Whatever form his 10 percent plan takes, it’s tacit acknowledgement that the 2017 tax overhaul isn’t proving as popular as Republicans had hoped -- and isn’t the boon for middle-class families that was promised.
Trump first floated the middle-class tax plan on Saturday after a rally in Elko, Nevada, which caught Republican lawmakers off guard. The president said Monday a plan would be unveiled in the next week or so that would entail “a middle-income tax reduction of about 10 percent.” He added that Congress would vote on it after the November elections.
Trump economic adviser Larry Kudlow told reporters Tuesday that the the White House was working with the tax-writing House Ways and Means Committee on crafting a middle-class tax cut plan, but “it may not surface for a while.”
A White House spokeswoman said Trump wants his middle-class proposal to be added to a separate package of tax bills the House approved in September dubbed Tax Reform 2.0 that would make all changes for individuals in last year’s tax law permanent. The Senate hasn’t shown any interest so far in taking up the House tax bill.
Given the potential for the House to flip to Democratic control after the elections -- and what’s expected to be a slim Republican majority in the Senate -- it’s unlikely tax legislation would be approved during a lame duck session. Spokesmen for House Speaker Paul Ryan and Ways and Means Chairman Kevin Brady, who the president said were working on the legislation, referred questions on plan details to the White House.
At a rally in Texas on Monday night, Trump told the crowd, “In fact, I just left Kevin Brady. We’re going to be putting in a 10 percent tax cut for middle-income families. It’s going to be put in next year. In addition to the big tax cuts you’ve already gotten."
Last year’s tax law slashed income tax rates, with top earners seeing a cut to 37 percent from 39.6 percent. For individual filers, income up to $9,525 has a 10 percent rate, up to $38,700 faces a 12 percent rate and up to $82,500 sees a 22 percent rate. A cut of about 10 percent could move those rates down to 9 percent, 11 percent and 20 percent, respectively.
A new round of tax cuts without offsets would further add to the deficit, which reached $779 billion, a six-year high, in Trump’s first full year in office.
Still, Steve Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center, said reducing rates is a more effective way to lower taxes than to create new programs, which is more complicated. “It’s too hard to tailor the rules to target the exact categories of people that we want,” he said.
The White House could also propose reducing the overall tax burden for middle-class Americans by about 10 percent -- a more complicated endeavor that would likely involve boosting credits, and comes with a hefty price tag.
Reducing the tax burden by 10 percent for those earning less than $75,000 a year would cost the federal government about $410 billion over a decade, according to an analysis of estimates from the nonpartisan Joint Committee on Taxation.
The effort could include expanding the earned income tax credit, increasing the child tax credit or reducing taxes on Social Security benefits for retired workers. Bolstering the EITC, a popular tax break for low-income workers, is one of the most direct ways in the existing code to lower levies for earners at the bottom part of the income ladder, according to tax experts.
Another way to help middle-class taxpayers would be to cut the 7.65 percent payroll tax -- which would mean the rate would drop to about 6.89 percent after a 10 percent cut. Unlike an income tax reduction, a payroll tax cut would help households that don’t have any income tax liability because they don’t earn enough.
About 44 percent of households paid no federal income tax in 2016, but about 60 percent of those have members who work and will be subject to payroll taxes, according to estimates from the Tax Policy Center.
Payroll Tax Cut
“If you’re looking at an 18- to 59-year-old working Trump voter, FICA is the biggest tax they pay,” Ryan Ellis, a Republican tax lobbyist, said referring to the Federal Insurance Contributions Act taxes that fund Social Security and Medicare.
Congress temporarily cut the payroll tax by two percentage points under President Barack Obama in 2011 and 2012. That tax cut cost about $111.7 billion in 2011 and slightly more the following year, according to the Joint Committee on Taxation.
However, people didn’t really notice how the tax cut affected their take-home pay, according to research conducted after the tax cut expired in 2013 by the left-leaning Center for Economic and Policy Research. More than half of the respondents said they didn’t know if their tax payments had changed, according to the survey results.
Whatever Trump plans to release next week, it’s likely still being figured out, Ellis said. “His basic political intuition is to run on what you’re going to do, not what you have done.”
(Updates with comment from Larry Kudlow in sixth paragraph.)
--With assistance from Jennifer Jacobs, Alyza Sebenius and Justin Sink.
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