House Republicans allowed themselves a $1.5 trillion net tax cut in their latest tax reform bill, but early analyses suggest that the benefits of that cut won’t be evenly distributed and that some subsets of the population could end up worse off in later years.
Jason Furman, former chair of the Council of Economic Advisers during President Obama’s administration, told Tax Analysts that the bill looks as though it would raise taxes on tens of millions of households.
“What is striking is that these tax increases are happening despite the $1.4 trillion price tag,” Furman said. “[It’s] because the bill provides large tax cuts for high-income households.”
“The bill is a large, regressive tax cut,” echoed Greg Leiserson of the Washington Center for Equitable Growth. “The largest tax cuts as a percent of income and the overwhelming share of the dollars accrue to higher-income families,” he said.
According to Leiserson, high-income families — particularly those with substantial business assets and those who will inherit large fortunes — stand to gain the most because of the decision to make the corporate tax rate cut “the centerpiece of reform, rather than pursuing other approaches to business tax reform.” Repealing the estate tax and providing a preferential passthrough tax rate augment that effect, he said.
Distributional estimates provided by the Joint Committee on Taxation (JCX-49-17) indicate that, while taxpayers at all income levels are likely to see a tax cut in the early years after the bill would take effect, some lower-income taxpayers earning less than $40,000 per year could see tax increases beginning in 2023. Additionally, some higher-income taxpayers earning between $200,000 and $1 million would briefly see their taxes rise in 2023.
Although the JCT document does not explain why some taxpayers face increases, the Center on Budget and Policy Priorities surmised in a November 5 report that the increases could be attributed to the plan’s proposed expiration of the $300 family credit in 2023, adjustment of tax code parameters to the chained CPI method, and expiration of the temporary expensing provision.
Furthermore, the JCT’s distributions only show averages for each income group. “Within each income group, there will be filers facing tax cuts and tax increases — depending on households’ family structure, sources of income, and deductions,” the report said. “The averages mask these potentially very large differences within income groups.”
The JCT distribution does not include changes to the estate tax in its distributional tables, but CBPP argued that when estate tax changes are plugged in, that alters the debate over who benefits from the Republicans’ tax cuts.
The provision to initially double the estate tax’s exemption levels before eliminating it completely beginning in 2024 represents “one of the tax plan’s most regressive aspects,” the CBPP report said. With estate tax repeal included, CBPP estimated that households earning more than $1 million would get a 3.2 percent increase in after-tax income, amounting to “16 times the percentage increase for any income group in the bottom half of the income distribution.” Further, nearly half of the tax cuts in dollar amounts would go to households earning more than $500,000, which make up less than 1 percent of overall filers.
Even without changes to the estate tax, though, William G. Gale of the Urban-Brookings Tax Policy Center said the tax bill’s proposed changes “would still be a big tax cut for rich.” For the higher-income earners that do wind up paying more in taxes, Gale said those tax increases could likely be attributed in large part to the repeal of deductions that make itemizing less favorable.
According to a November 3 analysis by the Tax Foundation, the average taxpayer in each income quintile would receive a net tax cut on a static basis after accounting for individual and corporate tax changes both in 2018 and in 2027. However, the report noted that some high-income earners between the 90th and 99th percentile would see their after-tax incomes drop slightly by 2027. On average, taxpayers would see a 0.9 percent static increase in after-tax income by the end of the tenth year, with increases ranging from 0.4 percent for the bottom quintile to 1.1 percent for the top quintile.
The TPC released its own distributional analysis of the House tax bill on the afternoon of November 6, but retracted the analysis hours later after it discovered an error in calculating the effects of changes to the child tax credit.
Concerns over the tax bill’s progressivity could diminish if it yields the kind of economic growth Republicans are hoping for.
The Tax Foundation analysis also featured macroeconomic feedback estimates, which indicated that all income groups would see their after-tax incomes rise by an average of 4.4 percent in 2027, with each income quintile averaging at least a 4.1 percent increase.
A dynamic score from the JCT is not yet available; House Ways and Means Committee Chair Kevin Brady, R-Texas, said in late October that such a score would be made available before the full House votes on a tax reform bill.
In the meantime, Gale said he believes the House bill is a mixed bag when it comes to pro-growth provisions, and that he doesn’t expect JCT’s dynamic score to be very big, citing previous macroeconomic analyses of the Republicans’ tax reform framework, which broadly mirrors the House tax bill’s major provisions.
Matter of Faith
Whether the House tax bill can be perceived as a middle-income tax cut also depends in part on whether future lawmakers behave the way current lawmakers hope they will.
According to some House Republicans, the 2023 sunset date for the $300 family credit was included to meet budgetary requirements, with the expectation that it would be extended as that deadline approached in separate legislation, just as many of the 2001 and 2003 Bush tax cuts were.
The $300 supplemental credits and other temporary provisions in the bill are “there to meet a revenue number,” Rep. Peter J. Roskam, R-Ill., told reporters November 2. The temporary provisions will likely be maintained, he said.
“These are things, I think, that future congresses are going to feel compelled to keep in place,” he said.
House Majority Leader Kevin McCarthy, R-Calif., echoed that sentiment, saying November 5 on CBS’s Face the Nation that House taxwriters had to include an end date on the family tax credits to make the bill work within the constraints of the $1.5 trillion budget resolution.
“But I promise you this: As the [economic] growth comes in, those will be kept,” McCarthy said.
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David van den Berg contributed to this article.