August 9, 2018
August 9, 2018
In this illustrated breakdown of the Tax Cuts and Jobs Act (TCJA) and Tax Cuts 2.0, ITEP staff examine TCJA’s role in growing income inequality, broken promises from corporations pledging to invest tax savings into workers and wages, and the embarrassment of riches flowing to the wealthiest Americans as a result of these “middle-class tax cuts.”
For more than 40 years, a greater share of the nation’s income has concentrated among the most affluent households.
Since 1976, the share of household income has declined for every income group except the top 20 percent, according to U.S. Census data. For example, the lowest-income 20 percent of households received 5.6 percent of the nation’s income while the wealthiest 20 percent received 41.2 percent. By 2016, the poorest households’ share of the nation’s income shrank to 3.5 percent while growing to 50.2 percent for the highest-income households. Over that same period, the middle-income quintile’s share of household income shrank from 17.3 percent to 14.7 percent.
The overwhelming majority of tax cuts since 2000
have gone to the wealthy.
Policymakers who support tax cuts continue to peddle them as “for the middle class” to secure public support. But the truth is, both the Bush tax cuts and the Trump-GOP tax cuts mostly benefit the wealthy. In fact, the richest 20 percent have received 65 percent of all tax cuts since 2000. By comparison, the lowest-income 20 percent received 19 percent of the cuts.
Even after a handful of progressive tax changes during the Obama Administration, the wealthy continued to benefit most from tax cuts.
In 2012, nearly all the Bush tax cuts were in effect. Under the Obama Administration, some progressive tax changes, such as expansions to the Earned Income Tax Credit and Child Tax Credit and a payroll tax holiday in 2015, reduced the share of tax cuts going to the richest taxpayers, but they continued to benefit most. In 2018, President Trump and Congress enacted the TCJA, adding cuts to the personal income tax and estate tax on top of Bush-era provisions still in place.
The Tax Cuts and Jobs Act
exacerbates growing income inequality.
The recent tax law will boost the after-tax income of the richest 20 percent by 4.8 percent on average compared to a 3.4 percent boost for the lowest-income 20 percent and a 3.5 percent boost for the middle-income quintile. In effect, this means that the tax law is creating an even bigger income divergence between low- and high-income families.
In 2018, the highest-income 5 percent will receive nearly 50 percent of tax cuts under the Tax Cuts and Jobs Act.
Although growth in household income for the very richest households has outpaced that of all other households over the last few decades, GOP leaders and the White House crafted a tax law that gives away even more to the richest families.
Foreign investors collectively will receive a greater share of the recent tax cuts than low- and middle-income families.
Due to a 40 percent cut in the corporate tax rate, the wealthy, including foreign investors, receive the greatest overall share of cuts in the TCJA. In fact, an ITEP analysis shows that the share of the $1.5 trillion tax cut going to foreign investors is greater than the share going to the lowest-income 60 percent of Americans.
Millionaires receive the largest share of pass-through deductions championed for small businesses.
While touted as a break for small businesses, one of the costliest, loophole-ridden, and regressive provisions in the TCJA is the 20 percent deduction for pass-through businesses. It will create opportunities for accounting games by the wealthy who will seek to redefine their income any way they can so that it is eligible for the 20 percent tax break. According to the non-partisan Joint Committee on Taxation, over half the $60 billion benefit of the tax break will go to millionaires and 80 percent to those making over $200,000 in 2024. Rather than allowing this regressive provision to expire, the Tax Reform 2.0 will make it permanent.
Profitable corporations already were not paying their fair share before they were showered with tax cuts.
Before the recent tax law passed, the statutory corporate tax rate was 35 percent. Corporate lobbyists often pointed out that this was the highest tax rate in the world. What they failed to mention, however, was that most profitable corporations paid nowhere near that rate. In fact, over an eight-year period, profitable Fortune 500 corporations paid an average effective tax rate of 21.4 percent thanks to copious loopholes. The recent tax law slashed the federal corporate tax rate from 35 percent to 21 percent without closing most loopholes that allowed corporations to reduce their effective rates. In 2018, the effective tax rate is projected to be just 9.2 percent.
Over 10 years, the new tax law
will pile trillions onto the nation's debt.
The Congressional Budget Office projects the tax law will add hundreds of billions to the deficit each year, piling $1.9 trillion onto the national debt in the next decade. Unfortunately, many GOP leaders are using this mounting national debt as an excuse to propose deep cuts to vital programs and services, including Social Security, Medicare, Medicaid, education, housing assistance and food assistance. They fail to admit that tax cuts are a key contributor to rising annual deficits.
Instead of investing in workers who make their profits possible, most corporations are using their tax savings to enrich wealthy shareholders.
While many corporations claimed they would pass on their tax savings to workers, most companies instead have enriched wealthy shareholders by buying back shares and paying bigger dividends. In fact, corporate stock buybacks are on pace to reach record levels this year. A recent study examined two years of data and found that if companies invested in boosting worker pay instead of stock buy backs, they could dramatically increase workers’ wages, which have been stagnant over the past two decades.
Even though the economy is growing, workers’ real wages have, in fact, fallen since the tax law passed.
The economy is growing but so is inflation. So, even though workers’ average wages have increased modestly since last year, when inflation is factored in, their real wages are slightly less. Simply put, workers can’t afford to buy the same amount with their paychecks today as they could in 2017. Recent Bureau of Labor Statistics data reveal the primary reason workers are earning marginally more in nominal dollars is because they are working more hours—not because they are receiving pay raises.
Making the temporary provisions in the TCJA permanent is simply a continuation of an unpopular tax policy that mostly benefits the wealthy and corporations.
GOP leaders continue to try to convince the public that the rancid castor oil known as the Tax Cuts and Jobs Act is actually good for us. Recently, they announced their intention to make temporary provisions of the tax law permanent, with the House Ways and Means Committee releasing a statement announcing, “Tax Reform 2.0 is about locking in these tax cuts for middle-class families and small businesses, and changing the culture in Washington so that America never again falls behind its global competitors.” The truth is, the TCJA primarily benefits the wealthy, and over time increases taxes on the poorest 20 percent. Extending its provisions past 2025 further benefits the richest Americans while maintaining a net tax increase on the poorest 20 percent.
- Corporate Taxes
- Education Tax Breaks
- Federal Policy
- Personal Income Taxes
- Property Taxes
- Sales, Gas and Excise Taxes
- State Corporate Taxes
- State Policy
- Tax Analyses
- Tax Basics
- Tax Credits for Workers and Families
- Tax Credits for Workers and Families
- Tax Reform Debate