What Trump’s Tax Cuts Could Look Like If They Did What He Said They Would Do.
Donald Trump promised the American people “The rich will not be gaining at all with [his tax] plan.” Supposedly the focus of tax cuts would be on the middle class. Regarding his tax plan Trump explicitly said “it’s not good for me, believe me.” The wise rule of thumb for when this President says “believe me,” is to believe the very opposite.
The tax bill turns out to be mostly a very bigly break for big corporations. Of the $1.5 trillion in tax reduction about $1 trillion of that, fully 2/3s, is for massive corporate tax reductions that includes cutting the corporate tax rate by 40%. Much of this tax reduction will benefit the wealthy in the form of increased returns on their shareholder investments in corporations and increased wages for high level corporate officers who enjoy the luxury of effectively determining their own pay.
The remaining $500 billion is supposedly the reduced income taxes that Trump falsely claims will be benefit the poor and middle class. In fact, the richer you are the more you will generally benefit from the income tax reductions. Republicans, such as Paul Ryan) say this is just a necessary effect of cutting tax rates. The rich must benefit some because they pay the most anyway.
All too often when tax burdens are discussed the only tax mentioned is federal income tax. Politicians dishonestly claim the poor pay no taxes. Thus they claim any cut in taxes must incidentally benefit the rich more because they pay more.
This is a credible argument only if you don’t count the regressive payroll tax which is a substantial source (over a third) of Federal revenue. Many poor who pay very little income taxes (if any) do contribute to the tax roles by paying that regressive tax and it is a significant share of their income. For the wealthy payroll taxes are not a significant share of their income because for it the payments are capped. Only the top 6% of taxpayers benefit from this cap. If you want to know what a regressive tax policy distribution looks like see the chart below.
If you want to implement a tax policy that target tax cuts to the poor and middle class, and not disproportionately helping the wealthy, then there is a very simple way to do it. Go for the regressive tax that the poor and middle class contribute disproportionately to.
Here’s a very simple proposal. Eliminate the cap on payroll taxes. Make this proposal revenue neutral by reducing the payroll tax rate so no additional tax burden is imposed on society as a whole. I don’t know the actual numbers, but let’s assume the current payroll tax rate of 15.3% could be reduced to 10% if the cap on it were eliminated and still bring in the same revenue.
Quite clearly the poor and middle class pay less and the rich pay more because without the cap all of their income is subject to the payroll tax (something already true for poor and middle class wage earners). This is exactly what Trump repeatedly claimed the objective of his tax reform would do. Yet this very simple approach was not even in the conversation. Why? Because he was lying and that never really was the objective.
Nor was the objective, as claimed, to simplify the tax code. The new tax code is every bit as a complex as the last one.
The objective was to benefit Trump’s rich friends, and their businesses, and that is mostly what this bill does. Trump confessed who the true beneficiaries were as shortly after signing the bill he bragged to his rich buddies at Mar-a-Lago that they “all just got a lot richer.” Yes, some comparative crumbs are thrown to the middle class and poor (crumbs that last only a few years while tax cuts to corporations and the wealthy are retained indefinitely). These crumbs are to prop up the facade of middle class tax cuts. But the facts of this law are what they are.
There have been proposals to “scrap the cap” though the intent is generally to improve the viability of the Social Security program rather than cut taxes for the less than wealthy. However, reducing the regressive nature of the payroll tax for even this purpose does not appear much in the national dialogue.
It is time to make the payroll tax, and its regressive nature, part of the national dialogue.