Help for Your Thanksgiving Day Tax Debates

Marc Stier |

If your family is anything like ours, politics tends to come up around the Thanksgiving Day table and diverse opinions are often put forward, including by one or more of our cranky uncles who mutter about “those people” and the “damn government.” Since your cranky uncles like mine no doubt listens to Rush and his friends, they are going to present you with a lot of misinformation about the GOP federal tax cut bill.

But have no fear as we have your back.

Claim: Of course we are cutting taxes for the rich and not for the poor. Only the rich pay income taxes.

Answer: This is the myth that helped cost Mitt Romney the election in 2012. It’s totally misleading. It is true that in good economic years, about 40% of households don’t owe federal taxes. But:

1. If we include federal payroll taxes, only about 14% of households pay no taxes in a typical year. Moreover, payroll taxes takes a higher percentage of the income of poor and middle class people than the rich because of the caps on income eligible for Social Security and Medicare taxes.

2. Most of the people who pay neither federal income tax nor payroll taxes are low-income people who are elderly, unable to work due to a serious disability, or students, most of whom subsequently become taxpayers.

3. There is a great deal of churn in who does not pay federal income tax as incomes rise and fall. About 18% of those households who don’t owe federal taxes in any year, pay taxes the next year. About 50% who don’t owe taxes in any one year start paying them within 5 don’t 5 years. Much the same is true about households who receive federal benefits (other than Social Security, Medicare and Medicaid). About 30% do so for only one year and only 50% do so for two years out of ten. (Much the same is true for Medicaid recipients.)

4. Low-income families pay substantial state and local taxes. Indeed, they pay a larger share of ther income than the richest families. Excluding the elderly, the bottom 20% of families pay 10.9% of their income in state and local taxes lowest income while the top 1% pays 5.4%. Federal tax policy limits taxes on those with low incomes, in part, to correct this imbalance at the state and local level.

Claim: We need tax cuts on the rich and corporations to create jobs and build a strong economy.

Answer: We’re all for creating jobs and building a strong economy. The problem is that these tax cuts can’t get us there.
The claim that tax cuts will create enough economic growth to offset the $1.5 trillion cost of the bill flies in the face of decades of experience with federal and state tax cuts, credible, mainstream economic research, and estimates from non-partisan analysis using mainstream economic models.

The American economy continues to grow as the effects of the Great Recession move into the past. While additional investment might lead to faster growth, there is little reason to think that tax cuts for business will spur such investment.

Business profits are near record highs, as are corporate savings while interest rates are near record lows which means that businesses have little trouble finding funds to make additional investments.

The real barrier to additional business investment is slow growth in consumer demand. Even very large tax cuts for the richest Americans is not likely to increase consumer demand as the rich are likely to save much of the additional, post-tax income. If we want to spur investment we should be increasing wages for people who will spend their additional earnings, by increasing the minimum wage and investing in infrastructure.

And, finally, the impact of an additional $1.5 trillion in deficits while the economy is growing is likely to be higher interests rates. And that will tend to depress business investment and undermine economic growth.

Claim: Corporate taxes in America are far higher than in any other advanced country.

Answer: The existence of huge loopholes in the corporate tax system means that the effective tax rate American corporations pay is on par with, or even lower, than corporations in other advanced countries

A 2016 study produced by the Government Accountability Office found that the effective tax rate paid by large profitable American corporations from 2008 through 2012 was just 14 percent. It found that the share of these corporations paying no federal income tax at all was 19.5 percent in 2012 and 24.1 percent in 2011.

Since 1952 corporate taxes as a share of all taxes have fallen from 5.9% to 1.9%. At the same time corporate profits as a share of the economy has risen from 5.5% to 8.5%

Claim: Corporate income tax cuts mean more household income.

Answer: Middle-class workers shouldn’t expect a pay raise from the Republican tax plans.

Mainstream, independent, expert organizations such as the Congressional Budget Office, the Joint Committee on Taxation, non-political experts at the Treasury Department, and private experts like the nonpartisan Tax Policy Center all agree workers would get a small share – roughly a quarter or less – of the benefits of corporate tax cuts. Moreover, the small share of gains that does go to workers would mostly show up in the salaries of high-paid executives and CEOs, not typical workers.

The claim from Council of Economic Advisers Chairman Kevin Hassett that a 20 percent corporate tax rate would “increase average household income in the United States by, very conservatively, $4,000 annually,” is substantially higher than anyone would expect from previous “dynamic analyses” by Congress’s professional estimators of how tax cuts affect economic growth and revenues. In fact, some of the economists the CEA report cited have cast doubt on its findings.

Claim: States will get a boon in revenue from the Republican tax plan.

Answer: No, federal tax changes along these lines will not be a boon to state revenues across the country. In fact, ultimately, many states—and their residents—will likely be worse off under this tax plan.

First, some provisions in the laws would cause states to lose revenue (such as the provision allowing full business expensing would do in the next few years).

Second, other provisions, such as repealing or sharply limiting the federal deduction for state and local income and sales taxes, would make it harder for states to raise revenue.

And, finally, the President and Congress have been clear that they intend to pay for these tax cuts down the road by shifting large new costs to states and localities through cuts to Medicaid and other forms of federal aid.

Claim: Even if the tax cuts don’t benefit working people and the middle class, they won’t be hurt by them.

Answer: Working people and the middle class are very much hurt by the Senate Republican tax plan.

1. To pay for permanent tax cuts for corporations, the Senate bill would, on average, raise taxes on the bottom 60% of families ranked by income. Every income group below $75,000 would face tax increases, on average. For example, households between $40,000 and $50,000 would see a 0.6 percent ($280) decline in their after-tax incomes. Many millions more families would face a tax increase in 2027 due to the expiration of such provisions as the increases in the Child Tax Credit and standard deduction

2. To pay for cuts to taxes on the rich and corporations, the Senate bill ends the individual mandate to have health insurance. That will increase the number of uninsured Americans by 13 million. Those who still are able to purchase insurance on the individual market will see large increases in premiums. Individual market premiums for a family of four would increase by $1,990.

3. Under the Senate bill’s Child Tax Credit increase, its signature proposal intended to help working families, 10 million kids in working families would receive only a token benefit of $75 or less in 2018.

And these numbers only tell part of the story of how working and middle-class families will be hurt as a result of the Senate bill. By adding at least $1.5 trillion to the deficit, that bill will force future cuts to programs that benefit low- and moderate-income families. Indeed, the budget passed earlier this year by Congress proposed to ultimately pay for the tax cuts with deep cuts to programs like Medicaid, Medicare, education and SNAP that would add to the pain families feel as a result of this bill.

Claim: At least this tax plan is good for small businesses.

Answer: Small businesses aren’t winners under this tax plan, either. The special deduction for pass-through businesses in the Senate bill is often mislabeled a small business tax cut, but it overwhelmingly benefits the wealthy and big businesses while doing far less for small businesses.

A similar, previous proposal would have given 49 percent of its tax cuts to households with annual incomes over $1 million and just 16 percent to households with incomes below $200,000, according to the Tax Policy Center. The percentage increase in after-tax incomes would have been 20 times as much for millionaires as for households making less than $100,000, on average, TPC concluded. Part of the reason for the top-heavy tilt of a pass-through tax cut is that most pass-through income flows to the very highest-income people, and to very large businesses.

And finally fight back: why are we debating tax cuts that mostly benefit the rich?

Average income for the lowest-income 40 percent of households is less today than it was in 1999. For the middle 20 percent, average income has barely budged. For the richest quintile and the top 5 percent in particular, the story has been quite different: Their incomes have soared [view chart]

We should be talking about how to raise wages and incomes for working people and the middle class, not how to benefit corporations and the very rich.