The Corner

Economy & Business

Some Basic Realities of the Tax Bill

Today brought analysis of the tax bill from the Joint Committee on Taxation (JCT), the Tax Foundation, the Tax Policy Center (TPC), and Penn Wharton. There’s nothing shocking here, but the new reports reinforce some basic facts about the bill that sometimes get lost in the din.

First: Yes, the bill adds to the deficit. The JCT puts the revenue loss at $1.456 trillion over ten years, though it doesn’t take into account the fact that the tax cuts might spur economic growth. The Tax Foundation, which not only takes growth into account but estimates it optimistically, puts the revenue loss at $448 billion, which is still nearly $1,400 for every man, woman, and child currently living in the U.S. Penn Wharton, which takes a dimmer view of tax cuts financed with deficit spending, says we’ll lose $2 trillion even after accounting for growth.

Second: This bill contains some expensive gimmicks, such as letting all the individual tax cuts expire after 2025. This stems the revenue loss in the official scoring system, but in reality Congress will face immense pressure to extend the various tax breaks as their expiration dates approach. The Tax Foundation finds that if all the bill’s provisions were permanent, the revenue loss would be $1.4 trillion over ten years even with growth taken into account. Then again, the long-run GDP boost would be 4.9 percent instead of 1.7 percent.

Third: The vast majority of people will get a tax cut or at least be held harmless. The Tax Policy Center estimates that only 5 percent will see their taxes go up next year, rising to 9 percent in 2025.

Fourth: The tax cuts may or may not be skewed toward the rich, depending on how you like to do the math. Do you see the bill’s price tag as a big pot of money we should divide up as equitably as possible? Or is the goal here to reduce the burden of taxes, which falls mostly on the rich to begin with?

Certainly richer taxpayers will save more in raw dollar amounts. The TPC says the top 20 percent will save $7,640 on average next year, while the bottom quintile will save $60. The wealthy will also see a bigger proportional boost to their after-tax income, changes to which range from 0.4 percent (for the poorest quintile) to 2.9 percent (the top one) in the TPC’s estimates, though they vary far less in the Tax Foundation’s.

But as Chris Edwards noted a couple weeks back, it also makes sense to look at tax cuts as a percentage of taxes currently paid. If you reduce one person’s tax burden from 30 percent to 15 percent of his income, and another person’s from 1 percent to 0.5 percent, the latter will get a smaller boost to his after-tax income even though both saw their tax bills cut exactly in half.

The TPC says the poorest quintile will see their overall tax rate, including payroll taxes, fall 0.4 points to 3.7 percent – suggesting it started at 4.1 percent and fell by about a tenth (or 10 percent). Moving up the income spectrum, the other quintiles will see their tax bills fall 13 percent, 10 percent, 9 percent, and 9 percent. Seen this way, the bill is a pretty equitable way to cut taxes. And if you were to exclude payroll taxes from the calculations, as Edwards did with an earlier version of the tax bill, you would see a stronger tilt in favor of lower- and middle-income groups.

Finally, if you catch anyone citing the distributional tables from the JCT, which show taxes on the low-income skyrocketing in many years, remind them that the agency treats the repeal of the individual mandate as a tax hike on people who no longer get subsidies.

I called the bill a mixed bag yesterday; that still sounds about right.

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