The Trump/GOP Tax Act

Update on The Massive Giveaway to the Rich

By John Miller

A version of this article will appear in the February issue of Labor Notes.

Judging by what’s in the Tax Cut and Jobs Act, Donald Trump and the Republicans who pushed this disastrous bill through Congress in December must have thought American inequality wasn’t severe enough.

As anticipated their act showers benefits on the best-off taxpayers. For the rest of us, it offers only meager tax reductions written in disappearing ink.

In 2018, the Tax Policy Center estimates, taxpayers with incomes of $1 million or more will get an average tax cut of $69,660, while those under $75,000 will get an average cut of $353. By 2027, 81% of the tax cuts will go to those taking in more than $1 million, while taxes on those making less than $75,000 will go up.

Bonanza for the Rich

The final version of tax act did not repeal the estate tax and the Alternative Minimum Tax (AMT) as some earlier versions had, but it nonetheless lavished tax cuts on the wealthy.

First, the act lowers the top income tax rate from 39.6% to 37%, benefiting taxpayers whose income exceeds $426,700.

Second, it increases the exemption for the alternative minimum income tax, which benefits nearly exclusively taxpayers with over $200,000 of income.

Third, it doubles the exemption for the estate tax to $11.2 million. This overwhelmingly benefits the top 10% of income earners, and especially the richest 0.1 percent—those with annual incomes in excess of $3.9 million.

The act does put a $10,000 cap on the state and local taxes you can deduct from your federal income tax, a provision that will hit wealthier taxpayers in high-tax states. Residents of those high-tax states often vote Democratic.

Business owners and corporate stockholders will be especially rewarded. The act slashes taxes on corporate profits from 35% to 21%. Most studies find that more than three-quarters of the benefits of lower corporate tax rates go to owners of capital, rather than their employees, and close to half of the benefits go to the richest 1% of taxpayers.

In the name of providing tax relief to small businesses, the act allows one-fifth of the first $315,000 of profits of pass-through businesses (which pay personal income taxes instead of corporate income taxes) to go untaxed. Over 80% of the benefits of this provision will go to the top 5% of taxpayers, including the Trump family, which owns more than 500 pass-through businesses.

Effects Cancel Out Republicans were far stingier when it came to taxpayers with modest incomes, and most of tax cuts that will benefit lower and middle income people are set to expire in 2025.

The act did double the standard deduction—used by most low- and middle-income taxpayers—to $12,000 for individuals and $24,000 for married couples. But at the same time, it eliminates the $4,500 exemption for each taxpayer and each dependent. For a family of three, these lost exemptions will cancel out the doubling of the standard deduction.

The act doubles the child tax credit to $2,000. A family with two children and $100,000 of income will get the full $2,000 credit per child. But because the credit is only partially refundable, a family with two children and $24,000 of income will get a credit of just $1,400 per child, and families with lower incomes will receive even less—as little as $75 per child.

The bill also ends the itemized deduction for an employee’s unreimbursed job expenses, including union dues.

On top of all that, the bill scraps the Affordable Care Act mandate for individuals to buy health insurance or pay a fine. As a result, a projected 13 million fewer people will have health insurance. Premiums will rise, for non-group plans, by “about 10 percent in most years” in the next decade, according to the Congressional Budget Office.

Expect No Boom

Tax cut supporters insist that this lopsided pro-rich law will create an explosion of economic growth that will create jobs and enrich us all. It’s not happening.

Cutting taxes on the rich is not an engine of economic growth, as even the Congressional Research Service attests to. For Congressional Research Service economists Jane Gravelle and Donald Marples report that, “past changes in tax rates have had no large clear effects on economic growth,"

Cutting taxes on corporate profits is similarly unlikely to trickle down. After-tax corporate profits, when compared to gross domestic product, are already nearing record highs. In addition, corporations are unlikely to use their windfall to make the investments that will jump-start economic growth, create jobs, and raise wages. After all, if they’re not investing now, it’s not because of lack of funds. In 2016, according to Standard and Poor’s, U.S. firms were already holding in the country $800 billion in cash and liquid assets, which they were unwilling to invest in long-term projects.

Seemingly intoxicated by their coming tax windfall, some corporations are handing out bonuses to their workers. Most prominently Walmart announced a one-time $1,000 bonus to its employees—but buried the fact that only workers who have been with the company for 20 years will get the full $1,000. The average Walmart worker is expected to get under $200. The bonuses will cost Walmart only 2.2% of the $18 billion it’s likely to save over the next decade from the tax cut, leaving plenty to hand over to shareholders.

Hours later, Walmart revealed it was closing more than 60 of its Sam’s Club stores and laying off thousands of workers.

Watch Out

On top of all that, this tax giveaway to the rich adds a whopping $1.8 trillion to the federal budget deficit, according to the Congressional Budget Office. Republican lawmakers are already bemoaning the ballooning deficit they’ve created and saying they’ll have to cut Social Security, Medicare, Medicaid, and public services to close the budget gap.

That’s a one-two punch that we need to make sure doesn’t connect.

John Miller is a professor of economics at Wheaton College in Massachusetts and a member of the Dollars & Sense collective.

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