Under the tax-cut legislation Congress could pass by the end of the year, roughly three-quarters of all households would get a tax cut. But that’s only if taxpayers never have to come up with the $1.5 trillion in foregone tax revenue over a decade that the plan would cost Uncle Sam.
If taxpayers do have to cover that $1.5 trillion, the story will be quite different. The majority of households would actually face a tax hike, on net, according to a new study by the Tax Policy Center. And more likely than not, working- and middle-class households would end up worse off than the wealthy. “If you’re in the bottom 60% of the income distribution, then it’s very bad news,” says William Gale, co-director of the Tax Policy Center.
The cost of cutting taxes
Americans are skeptical of the GOP tax plan, which ought to be popular if it’s a legitimate tax cut for most families. But voters seem to suspect that a lot of unappetizing fine print accompanies a deal that sounds too good to be true. Polls show that more than half of voters disapprove of the GOP plan, with approval ratings ranging from the mid-20s to the mid-30s. The main objection seems to be the heavy weighting of tax cuts toward businesses and the wealthy, with a relatively small piece of the pie reserved for the middle class.
And that’s before accounting for who will bear the burden of that lost $1.5 trillion in tax revenue. To estimate that, the Tax Policy Center examined three scenarios meant to assess who the winners and losers would be if, or when, the bill comes due for the Republican tax plan. Since there are two ways to close a budget gap — either raise new revenue or cut spending — the group included both options in its analysis, and applied the analysis to legislation passed by both the House and the Senate.
None of the scenarios is comforting. If the cost of the tax cuts in the House plan were spread evenly among all taxpayers, 27% of households would enjoy a tax cut but 73% would face a tax hike. After-tax income would fall for lower- and middle-income workers, while rising for the top 20%.
If that $1.5 trillion were covered proportionally, according to income, the outcome would be slightly better, with 39% of households getting a tax cut and 59% facing a tax hike. The top 20% of earners would still end up better off, but not by as much in the first scenario.
If the cost of the tax cuts were covered proportionally, according to the portion of taxes household actually pay, it would be a bit better still. Sixty-five percent of households would get a tax cut, while 18% would face a tax hike. And the burden would fall a bit more heavily on high-income households than middle-income ones. Results for all three scenarios were similar in an analysis of the Senate bill.
Fallout from tax cuts
Trump and his fellow Republicans aren’t saying much about the cost of cutting taxes, although they are beginning to ramp up efforts to cut spending in 2018. If that happens, it will fall disproportionally on lower-income workers, if only because they receive more in government services. One Republican target is likely to be Medicaid, for example, which is designed to help those who can’t afford health insurance. Republicans may also target food and disability aid and other types of welfare programs.
Republicans have a ready counterargument to the question of how much their planned tax cuts will really cost: nothing. Some Republicans insist that lower taxes will generate so much economic growth that tax revenue will actually go up, not down. But most mainstream economists don’t believe that. There’s no evidence that tax cuts alone have ever boosted growth much. This time is unlikely to be different. Goldman Sachs, for instance, expects the tax cuts to boost growth by just three-tenths of a percentage point in 2018 and 2019.
Washington might get a break if interest rates remain near the super-low levels they’ve been at for nearly a decade, which has sharply reduced the government’s borrowing costs and allowed the government to take on more debt than economists used to think tenable. If rates stay low indefinitely or go lower, there would be less worry about recouping that $1.5 trillion somehow. But that seems unlikely to happen. The Federal Reserve, for one, has telegraphed its plans to continue raising rates in coming years, to keep inflation in check.
By the time that extra $1.5 trillion in debt becomes a problem, of course, somebody else will have to deal with it. The Reagan tax cuts in 1981 and 1986 created an eventual budget shortfall requiring attention — but not until Reagan was out of office, replaced by vice president, George H. W. Bush. Bush dealt with the budget shortfall by raising taxes in 1990, nearly a decade after Reagan first cut taxes. And Bush lost his re-election bid two years later — an unusual instance of a high-income American ultimately paying the price for tax cuts.
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Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman