Tax Analysts Blog

Are the Tax Bills Fair? House, No. Senate, Yes. So Far.

Posted on Nov 13, 2017

The ultimate fate of the tax cut now before Congress will probably depend more on fairness than competitiveness. But what is fairness?

From what I have heard so far, the threadbare debate goes something like this. Liberal person: “The rich get most of the tax cuts. That’s not fair.” Conservative person: “But the rich pay most of the taxes. So that’s fair.”

This is not an especially productive dialogue without more information. Assuming you think the current distribution of the tax burden is fair--admittedly, this is a big assumption but the one Congress nearly always uses--there is a simple and much better way to evaluate the fairness of this tax cut as it bobs and weaves its way through Congress. And the standard proposed here is simple both to compute and to understand:  A tax cut is fair if all taxpayers get an equal percentage reduction in their taxes. 

Suppose that under current law, Bob with $50,000 income and a 20 percent tax pays $10,000 in tax. Carol with $200,000 and a 40 percent rate of tax pays $80,000 in tax.  Carol pays eight times as much tax as Bob.

Now suppose there is a 10 percent across-the-board tax cut. Bob now pays $9,000 in tax. Carol pays $72,000, still eight times more than Bob. Assuming you agree with this standard—you don’t have to; anything goes when it comes to fairness—we can use the same idea to see how the House Ways and Means Committee and the Senate Finance Committee are doing.

Based on the latest official distribution estimates for 2027 from the Joint Committee on Taxation, the following figure shows that in percentage terms, low- income folks get less of a tax break—actually a tax increase for taxpayers between $20,000 and $30,000—than rich folks. This suggests that the House bill is hurting low-income families relative to the wealthy. In other words, the House bill would make the tax system less progressive. A distributional-neutral tax cut would give a 2.6 percent tax break to all. In the House, the over-$1 million crowd gets a 4.3 percent cut.

 

In contrast, the following figure for the first version of the Senate bill shows that low-income folks get a larger tax break in percentage terms than rich folks. This suggests that the Senate bill is helping low-income families relative to the wealthy. In other words, the Senate bill would make the tax system more progressive. A distributional-neutral tax cut would give a 4.2 percent tax break to all. The over-$1 million crowd gets only a 2.8 percent cut.

 

 

Congress sets a low standard when its goal is to give all working Americans a tax cut. A reasonable tax cut that purports to be focused on middle-class tax relief should give an average or above-average percentage tax cuts to those folks. The Senate bill, so far, seems to accomplish this. The House bill, so far, does not.

 

 

 

Read Comments (2)

Mike55Nov 14, 2017

The distributional impact of the House bill looks a lot different when considered in aggregate. The cuts for each income level vary significantly by year, so if just one year is considered the results will be misleading. This is how pundits from different ends of the political spectrum are able to make wildly different claims based on the exact same report (the Right is focusing on the highly progressive 2019 year, while the Left is focusing on the very regressive 2023 year).

For anyone curious when viewed as a whole, the distributional results of the House proposal are as follows: (1) households earning $200K - $500K are getting a smaller tax cut than they would if the cuts were proportionate; (2) households earning $1M+ are getting a larger cut; and (3) all other groups are getting the right amount. This remains true if you add the estate tax -- which the JCT excluded -- into the mix (the disparity between the $200K-$500K and $1M+ groups just gets larger).

I'm not really sure which side wins the rhetoric battle on those facts, nor do I particularly care. The point is simply that only looking at one year provides a misleading view, regardless of which side of the aisle is doing it.

AlNov 19, 2017

Can we see these charts based on income and whether the state is red or blue ?

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