No tax cut for the wealthy? Easier said than done
President Donald Trump has promised that wealthy Americans won’t get a massive tax cut as part of Republicans’ plans to rewrite the tax code.
But there’s a problem with that: Higher earners already shoulder most of the tax burden while average Americans pay a relatively small share of income taxes, making it increasingly difficult to cut taxes, particularly tax rates, without favoring the rich.
Story Continued Below
“It’s basically impossible to have a large tax cut that doesn’t involve most of the benefits going to high-income groups just because that’s who pays taxes now,” said Adam Looney, who was deputy assistant Treasury secretary for tax analysis in the Obama administration.
That’s a big political problem for Republicans who want their plans to rewrite the tax code focused on helping the politically all-important middle class. They know voters take a dim view of cutting taxes on the rich, and want to fend off inevitable attacks from Democrats that the GOP’s tax plans amount to a giveaway to millionaires and billionaires.
Republicans have already rewritten their plans to avoid giving so much to the wealthy. They’ve dropped plans to cut taxes on capital gains, and they’re considering a to-be-determined higher tax bracket on the rich.
Earlier this year, in a sign of Republicans’ nervousness over the issue, lawmakers dropped plans to kill an investment surtax on the wealthy as part of their Obamacare repeal plans, amid complaints it would disproportionately help the top 1 percent.
They’ve also repeatedly slammed a recent report by the nonpartisan Tax Policy Center showing their proposal would mostly help high earners.
“Do you know who we think about when we think about tax reform and tax relief?” House Speaker Paul Ryan asked during an event in Maryland last week to promote tax reform.
“We think about the moms and dads who go to bed worrying about the next day, whether or not they can make ends meet — we’re thinking about the people in this country who are living paycheck to paycheck,” he said. “The purpose of tax relief is: Give middle-income taxpayers a tax cut.”
But the challenge for Republicans goes beyond the particulars of the “Big Six” tax framework released in September or the Tax Policy Center analysis.
They are confronting a tax system where the tax burden is increasingly bunched up at the top of the income spectrum, thanks to huge earnings gains by the rich and the fact that the U.S. has one of the most progressive income tax systems in the world.
The top 0.1 percent of earners projected to pay more to the IRS than the bottom 80 percent combined. This year, official government data show, the top 20 percent will pay 95 percent of all income taxes.
The top 1 percent — about 1 million families earning at least $379,000 — will pay 45 percent of all individual income taxes collected this year, and almost one-third of taxes overall, including corporate, payroll, estate and excise taxes.
Meanwhile, more modest income gains among average Americans, as well as repeated efforts by Congress to cut taxes on low- and middle-income people, mean those groups are shouldering a declining share of the tax burden.
The average federal tax rate for people whose earnings put them in the 21st to 80th percentile of incomes has fallen by 30 percent since 1979 to 13.8 percent, according to the nonpartisan Congressional Budget Office. Rates on low-income people have declined even further, by 57 percent, to 3.3 percent.
“The fact that they don’t pay very much in taxes means that it’s very hard to provide them with a large tax cut,” said Looney, now a fellow at the Brookings Institution.
Not just that: It’s hard to cut tax rates on moderate-income people without simultaneously benefiting the rich. That’s because everyone pays the same marginal tax rates on, say, their first $50,000 in income, regardless of how much they make in total. So cutting, for example, the 15 percent tax bracket helps the poor and rich alike.
The challenge for Republicans is compounded by the fact that they aren’t simply trying to cut taxes on middle-income people. They also want to promote economic growth by reducing rates on businesses.
They plan to slash the corporate rate to 20 percent, from the current 35 percent — which President Donald Trump has called non-negotiable — while cutting taxes on unincorporated businesses to 25 percent.
But that exacerbates their income distribution problems, because those taxes are disproportionately paid by high earners who would be the primary winners if they’re cut.
Almost half of the corporate tax will be paid this year by the top 1 percent, according to Treasury. Economists believe the corporate tax is mostly passed on to companies’ shareholders. And nearly 60 percent of so-called Schedule E income — which includes earnings by S corporations, partnerships and limited liability companies — will accrue this year to people making more than $1 million, according to projections by Congress’ Joint Committee on Taxation.