Fiscal Policy

Trump’s Tax Cuts Made the Tax Code More Progressive

President Donald Trump speaks while participating in an executive order signing event in Washington, D.C., August 3, 2020. (Jonathan Ernst/Reuters)
Recent data from the IRS put to rest a common misconception about the 2017 tax reform.

Leading Democratic politicians such as Senate majority leader Chuck Schumer, House speaker Nancy Pelosi, and President Joe Biden have frequently complained that the Trump tax cuts were nothing more than a giveaway to the 1 percent, further rigging the tax code for those at the top. But the biggest unreported fact about the Tax Cuts and Jobs Act (TCJA) is that it actually made the tax code more progressive.

Indeed, recent data published from the Internal Revenue Service find that the share of income taxes paid by the top 1 percent of filers increased under the first year of the TCJA, while the share of taxes paid by the bottom 50 percent of filers decreased.

These findings come straight from an IRS report that breaks down the tax share of income earners for tax-year 2018 — the first year of taxes filed under the new provisions. Among its changes, the TCJA lowered tax rates, nearly doubled the standard deduction, and expanded the child tax credit.

The IRS data show that the top 1 percent of filers, those with adjusted gross income of $540,009 or higher, paid 40.1 percent of all income taxes. This amount is nearly twice as much as their income share.

Despite the rate reductions under the TCJA, the tax share of the top 1 percent increased compared to 2017. In fact, the National Taxpayers Union Foundation has compiled historical IRS data tracking the distribution of the federal income tax burden back to 1980, and 2018 was the highest share recorded over that period.

The top 10 percent of filers, those with adjusted gross income of $151,935 or higher, paid over 71 percent of all income taxes. This was also the highest share recorded in the data available since 1980.

The lower half of earners, with adjusted gross incomes of less than $43,614, owed 2.9 percent of all taxes. This was a decrease from the 3.1 percent recorded in 2017. The lowest share was recorded in 2010, during the recession, at 2.4 percent.

Similarly, between 2017 and 2018 the number of filers with no income-tax liability increased by 2.6 percent to 34.7 percent. The number of nontaxable returns is often related to the economy: As employment decreases and income falls, the number of filers facing no income taxes tends to increase, and vice versa.

While 2018 saw a strong economy that would ordinarily increase the number of individuals with income-tax burdens, the TCJA removed additional people from income-tax rolls by increasing the standard deduction and expanding refundable credits.

We now have a tax code that increasingly shields low-income earners from any income-tax liability and requires that individuals pay an increasing share of taxes as they move up the income ladder. To illustrate just how much the progressivity of the tax code has increased over the past 40 years, consider that in 1980 the top 1 percent of earners bore 19 percent of income taxes, the top 10 percent of earners bore nearly half of income taxes, and the bottom 50 percent paid 7 percent. That’s twice as much as today.

Nevertheless, various politicians and pundits continue to assail the tax-reform law as a regressive giveaway to those who “aren’t paying their fair share.” But again, under the TCJA, the wealthy are paying a larger share of income taxes than at any point over the past four decades, even though the top marginal rate dropped from 70 percent in 1980 to 37 percent in 2018.

The distribution of income taxes will doubtless be at the center of debates over tax policy in the new year. While campaigning, Joe Biden released a tax plan that would increase the top rate back to 39.6 percent and hike corporate tax rates, capital gains, and payroll taxes. Other Democrats such as Representative Alexandria Ocasio-Cortez (D., N.Y.) advocate a top income tax rate of 70 percent or more.

This new IRS data make clear that the TCJA ushered in a significant overall reduction in tax burdens that in fact made the code more progressive, not less. Congress would be wise to remember that when discussing future tax-reform efforts.

Demian Brady is the vice president of research at the National Taxpayers Union Foundation, a nonprofit dedicated to research and education on tax and budget policy at all levels of government.

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