While the world is distracted with Donald Trump’s possible ties to Russia, Washington continues to grind forward with his agenda. In a recent move, the Trump Administration has taken a major step that will help the nation’s wealthiest at the expense of households with low or moderate incomes.
In September 2018, the House is expected to vote on the “2.0” tax plan, a plan that would permanently extend the 2017 tax law’s individual provisions that were set to expire after the year 2025. According to an analysis by the Center on Budget and Policy Priorities, the proposed changes will exacerbate America’s growing problem of income inequality and hurt the nation’s overall fiscal picture.
Let’s start by looking at income shifting. The after tax income growth for a typical working-class American family has grown far more slowly over the decades since 1979 when compared to the family incomes of households with a college degree; if the income of the working-class family had grown at the same rate as a college-educated family, working-class household incomes would have been $9,600 higher in 2015 than they are now. As well, when we compare the share of income flowing to the bottom 60 percent to the top 1 percent, we find the following:
The 2017 tax law exacerbated this trend and, if the House passes the “2.0” tax plan, the situation will get even worse. By making the 2017 tax law’s provisions permanent, the average tax cut for a family in the bottom 60 percent of earners (those with incomes less than $86,100) will be only $340, resulting in after-tax income growth of 1.0 percent. For households in the top 1 percent (those with incomes greater than $732,800), the permanent tax law changes will result in an average tax cut of $32,650, resulting in after-tax income growth of 2.2 percent as shown on this graphic:
The top 1 percent of households will garner 61 percent of the total :
Here are some of the benefits that will accrue to the well-off:
2.) Estate tax exemption – the amount that wealthy households can pass on to their heirs has doubled from $11 million per couple to $22 million per couple. Those poor, sad couples with more estates worth more than $22 million will see their estate taxes cut by $4.4 million each. As well, thanks to new tax provisions that shield “unrealized capital gains” that have never been taxed will ensure that those who inherit the estates will never have to pay tax on their “estate lottery winnings”.
3.) Deduction for pass-through income – this is income that the owners of businesses like partnerships, sole proprietorships and S corporations report on their individual income tax returns. Before the 2017 law was enacted, this income was taxed at the same individual rate as a business owner’s salaries and wages. The 2017 tax law change means that the deduction for pass-through income cuts the marginal individual tax rate by 20 percent. This provision provides the most benefit for households in the top one percent since they will be able to avail themselves from 61 percent of its total benefit compared to only 39 percent for the 99 percent of us.
As you can imagine, all of these lovely tax savings for higher income households has a cost that will be borne by all Americans. According to the Congressional Budget Office, the 2017 tax law will cost the federal government $1.9 trillion over the decade between 2018 to 2027 and, if the House tax plan 2.0 passes, these cuts in revenue will be permanent. Here is a bar graph showing the tax losses per year in dark blue and the effect of extending the expiring 2017 tax law indefinitely under the House tax plan 2.0 in light blue:
While everyone loves to see taxes cut, as you can see from this analysis by the Center on Budget and Policy Priorities, the cuts in taxes are mainly accruing to wealthy Americans, the people that are far more likely to rub shoulders with and make substantial campaign contributions to policymakers in Washington than Main Street Americans. As well, given that Washington’s current illusion of fiscal health is seen through the rose-coloured glasses of an extended period of ultra-low interest rates, the idea that these tax cuts could be permanent is highly, highly unlikely.
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