By: Oleg Biletsky

GOP’s recent tax plan has been heavily criticized for its favoritism toward the upper class, but what has it actually done and how will it affect things going forward?

On December 22^nd, 2017, President Donald Trump signed the GOP tax bill to mark the biggest legislative accomplishment of his first year in office. In his 2018 State of the Union address, Trump claimed that the Tax Cuts and Jobs Act (TCJA) consists of “the biggest tax cuts and reforms in American history.” Although that statement has already been refuted by various sources, the tax cut nevertheless represents the eight largest in the U.S. since 1918 (Committee for a Responsible Budget Report). Although Republicans celebrated the bill as a major victory, it has been heavily criticized by those across the aisle for a number of reasons, mainly due to the inequality of benefits from the cut across income classes and the repeal of the individual mandate. To see if these and other criticisms are justified in light of the cut’s effects, we first need to examine the details of the bill itself.

Breakdown of the Tax Cuts and Jobs Act

The first major element of TCJA is the permanent slash in the corporate tax rate from 35% to 21%. The GOP’s justification for this massive cut is that it will prompt American businesses to increase capital investment, leading to an overall growth in production and demand for workers, therefore creating higher wages and increased consumption. The increase in profits of firms and eventual rise in wages should then boost the amount in tax collected by the government, thus offsetting the deficit rise caused by the corporate tax cuts. This theory is known as “trickle-down economics,” and its validity has been debated heavily over the years. One of the main arguments against this economic idea is that business investment and economic growth doesn’t rise enough for the tax cut to offset the deficit increase. This argument is supported by various projections for the impact of the TCJA on the GDP growth rate over the next 10 years. Analysis of GOP’s tax plan by University of Pennsylvania’s Wharton School of Business predicts that after TCJA’s 10-year period, the GDP will only be between 0.4% and 0.9% higher than with no tax changes. This small growth in GDP will not be enough to cover the losses of government revenue from the tax cut, possibly leading to a $1.5 trillion and $1.7 trillion loss in revenue by 2027. Even going by the more conservative Tax Foundation’s model, the government is still set to lose $448 billion over the next decade after a 1.7% increase in long-run GDP.

Other parts of the bill consist of changes to deductions, exemptions, child credit and income tax rates. TCJA increases standard deduction to $12,000 for singles, $18,000 for heads of households and $24,000 for married filing jointly. While we see a rise in the standard deduction, many other deductions are either eliminated, limited or modified. Personal and depended exemptions, which before TCJA translated to reductions of over $4000 in taxable income for individuals, are also eliminated. Child credit, on the other hand, increases from $1,000 to $2,000 (H&R Block Report). GOP’s new tax plan also lowers the income tax rate for 5 out of the 7 income brackets as shown in the table below:

 

Many of these changes may seem exciting on paper, but what is hidden in the bill is the substantial inequality in the amount of benefits given to different income classes. This inequality in benefits along with the elimination of the individual mandate represent the biggest criticisms of the bill. We shall take a look at these criticisms in the next section.

Main Criticisms of TCJA

What is undoubtedly causing a stir regarding the changes to income tax rates is the hidden favoritism for the wealthy. Although in 2018 the average household will receive a tax cut of $1,610—corresponding to a rise in about 2.2% in household’s income—the number varies drastically across income classes. Households earning $733 million or more will get an average cut of $51,000 or a 3.4% bump income, while those making between $49,000-$86,000 will only get a cut of $870 or a 1.6% increase in income (Tax Foundation Center Report). And after the individual income tax provisions expire in 2025, the Tax Foundation Center predicts that in 2027, taxpayers in the top 1% of income distribution will receive 83% of the total tax benefit for that year.

Besides TCJA’s discrimination toward the lower and middle classes, the bill also repeals the individual mandate, a crucial part of the Affordable Care Act (ACA). Obamacare’s individual mandate is a requirement by law for every citizen to purchase health insurance, and in order to greatly weaken Obamacare and offset some of the deficit increase caused by the tax cut, the GOP ended this provision in the TCJA. According to the Congressional Budget Office (CBO), the repeal of the individual mandate should lower the deficit by $338 billion in the next decade. This reduction falls short of covering the projected increases in the deficit discussed earlier, and it comes at a large cost. The CBO estimates that health insurance premiums will increase by about 10% in most years of the decade in the individual market created by Obamacare. This eventually should lead to a 4 million decrease in the insured population by 2019 and a 13 million decrease by 2027.

 Likely Implications

Over the next decade the Tax Cuts and Jobs Act is set to leave 13 million people uninsured and increase the deficit by $450-$1.7 billion, depending on the GDP growth rate. Such repercussions are the cost for the majority of Americans’ taxes to go down; however, as we examined earlier, the tax cuts are not spread evenly across income groups. After TCJA’s individual income tax provisions end in 2025, the top 1% is estimated to receive 83% of all tax benefit for the year 2027. Then there is also a question of the bill’s timing. The economy is currently in full swing and unemployment rate is the lowest it has been for 17 years. Traditionally, tax cuts were often thought of as a boost to the economy, increasing consumer spending and profits of firms, thus leading to increase in demand for consumer goods and labor. It is thus logical to implement tax cuts when the economy is recovering from a recession, but when the economy has been in a boom for nearly 9 years, it becomes highly questionable whether tax cuts should be applied to extend a healthy period in the economy. In fact, applying tax cuts now might actually hurt the country, possibly causing the economy to overheat and fall into a recession sooner that expected. According to the Federal Reserve Bank of New York President William Dudley, the accelerated growth caused by TCJA could give sudden rise in inflation, which would propel the Fed to raise interest rates quicker, potentially triggering a recession. Although we won’t know the full extent of TCJA’s effects till they occur, it looks like the gains for the majority of Americans may not last long, as millions of people are set to be uninsured, the majority of tax benefits are set to be collected by the upper class and a recession in the near future is a real possibility.

Sources:

Distribution Analysis of the Conference Agreement for the Tax Cuts and Jobs Act [PDF]. (2017, December 18). Tax Policy Center.

Full Details and Analysis: Tax Cuts and Jobs Act. (2017, December 20). Retrieved February 07, 2018, from https://taxfoundation.org/final-tax-cuts-and-jobs-act-details-analysis/

Is President Trump’s Tax Cut the Largest in History Yet? (2017, October 25). Retrieved February 04, 2018, from http://www.crfb.org/blogs/president-trumps-tax-cut-largest-history-yet

Kathy Pickering – Executive Director, The Tax Institute. (2018, January 09). Tax Cuts & Jobs Act (TCJA) | H&R Block. Retrieved February 07, 2018, from https://www.hrblock.com/tax-center/irs/tax-reform/tax-cuts-and-jobs-act/

Repealing the Individual Health Insurance Mandate: An Updated Estimate [PDF]. (2017, November). Congressional Budget Office.

Rovella, D. (2018, February 07). Your Evening Briefing. Retrieved February 07, 2018, from https://www.bloomberg.com/news/articles/2018-02-07/your-evening-briefing

The House Tax Cuts and Jobs Act, Amended (11/9/17): The Dynamic Effect on the Budget and the Economy. (n.d.). Retrieved February 07, 2018, from http://budgetmodel.wharton.upenn.edu/issues/2017/11/13/the-house-tax-cuts-and-jobs-act-amended-11917-the-dynamic-effect-on-the-budget-and-the-economy