Tax Analysts Blog

The Fairness Problem in the Senate Bill

Posted on Nov 17, 2017

On Capitol Hill and in the media, there is a great deal of debate about the fairness of the Senate bill, especially after the November 16 release of the distribution tables from the Joint Committee on Taxation. (Doc JCX-58-17 at www.jct.gov). Below is a visual summary of one of those tables with some (nonpartisan) embellishment by your author. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The figure shows the two most defensible and conventional ways of measuring distributional changes of tax bills: (1) percentage change in tax and (2) percentage change in after-tax income. If the blue and red lines were horizontal—that is, if those percentage changes were the same for all income categories (of course, impossible to do in reality—just a point of reference)—the tax bill would be distributional neutral. In other words, if you like the current distribution of the tax burden and after-tax income, the tax bill is fair.

The figure shows that taxpayers with income between $20,000 and $30,000 unambiguously suffer a percentage tax increase and reduction in after-tax income. Taxpayers making between $30,000 and $40,000 break about even. (This is one of five tables produced for two-year intervals in the 10-year window. All the tables before expiration of individual tax cuts look roughly the same as this.)

Importantly, matters are worse than shown for the earning-under-$40,000 crowd because the JCT estimates do not include—even though JCT revenue tables do include-- the reduced Medicaid benefits and insurance company subsidies these taxpayers drop when they are no longer subject to the Affordable Care Act’s individual mandate. The JCT for some reason counts these reductions in spending as tax increases in its revenue table (which helps Congress meet the $1.5 trillion net tax cut limit in reconciliation instructions), but does not include them in the distribution table (that is supposed to reflect burden across income categories).

The figure also shows that at the high end, taxpayers with over $1 million of income do less well than the middle and upper middle class. That’s a plus for high-end progressivity, but the underlying JCT estimates do not include the effects of estate tax relief, which primarily benefit the wealthiest.

You cannot boil this all down to a talking point—at least, if you want to be accurate. By citing selective statistics, Democrats can say the well-off pay less at the expense of the poor and Republicans can say the bill focuses on middle-class tax relief. But at least now you know the facts and can make up your own mind about fairness.

Read Comments (4)

Mike55Nov 20, 2017

This was a good, balanced summary. This whole tax cut "fairness" concept still eludes me though.

If I were on the Left, it'd probably be enough that (1) this legislation will raise aggregate income inequality in a country where income inequality is already far too high and (2) there is no obvious "counter-cyclical" justification for such a cut at this moment in time. Exactly how the pre-transfer spoils of such a harmful policy would be divvied up between various cohorts would strike me as irrelevant. Yet the real Left seems to only care about who gets the spoils, in the most granular of terms. Weird.

And if I were on the Right I'd be a lot more worried about what the dynamic scores will look like, and a lot less worried about the distribution tables. In theory tax reform is supposed to be all about growth, with any distributional fall-out to be debated on the spend side of the ledger (or using "trickledown" theory, or whatever). I'd probably think that even if my side won this particular battle, by tacitly accepting distribution neutrality as a prerequisite to any major tax policy change we'd have lost the war. Yet the real Right seems to be moving mountains to ensure distributional neutrality, and seems to have toned down its growth rhetoric. Also weird.

Travis RechNov 27, 2017

"Yet the real Left seems to only care about who gets the spoils, in the most granular of terms. Weird."

In fairness, I think the liberal politicians understand that republicans control the legislature and presidency, which means that a major tax cut is going to happen in some form or another. They could spend their time fighting a losing battle trying to prevent there from being any kind of regressive tax cut at all, but that would just be unproductive in the end. I'm thinking its more likely their strategy is to say, "well this is happening, how can we best mitigate the damage?"

Mike55Nov 28, 2017

Republicans have proposed a distribution neutral tax cut. If you start from the premise that a $1.5T unpaid for tax cut is going to happen, I'm not really sure how you'd realistically expect to do any better (from a Left perspective).

I mean, no tax cut at all would be better. Or a tax cut paired with something the Left wants as a compromise (e.g., infrastructure spending) would be better. But if your starting point is that there will be an unpaid for tax cut because the other side controls government, well, this is pretty much your "best of the worst" scenario.

Tim BiggartNov 25, 2017

I realize there are many fish to fry in this bill, but unless I misunderstand, doubling the standard deduction and eliminating personal and dependent exemptions in conjunction is not really a gain for many families. My wife and I file MFJ, and had this been in place last year, it would have gone like this: 12,600 (std ded) + 12,600 (doubling) - 8,100 (2 exempts) - 14,100 (itemized ded) = 1,000 net gain in ded. Note also that these two changes (unless I misunderstand them) discriminate against nuclear families. 2 parents and one child is roughly even: 12,600 doubling vs. loss of 3 exemptions 12,150. Each dependent beyond that costs the taxpayer $4000+ per child in deductions. In addition, will the "Kiddy Tax" on unearned income be affected? Thank you for your time, and please let me know if I have misunderstood the proposed changes.

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