Update: tax reform has failed to raise wages, as promised. Tax and economic policy is a key contributor to personal finance. And it’s important for us to know what kind of policy we’re helping enact when we vote – for our economic future and for our country’s future.
I’m a bit of an enigma when it comes to tax policy opinion. I’m somewhat fiscally conservative in that I think the government should aim to balance its budget, but I’m also in favor of more progressive taxation to help meet that obligation. Irresponsible tax cuts that blow up deficits may win voter favor, but they will be passed on to present and future generations (including ours). That’s a real concern for me. As are effective tax rates that are lower for CEOs than their secretaries or janitors. We’ve seen a major decline to historically low tax rates in the highest individual brackets and for corporations, and the end result has been massive budget deficits and a decline in desperately needed infrastructure, education, and other funding.
I wrote about the Republican tax plan in detail prior to its passing. The majority of what was in that article made it made it into the signed law, so I’ll just provide a short recap here of the main points before focusing on the early results. Additionally, there’s a lively discussion going on in my tax brackets and standard deductions article as some readers are starting to come to terms with the numbers.
Here are the basics of the tax plan:
- The tax rate for large corporations was lowered from 35% to 21% – a drop of 40%. And the corporate alternative minimum tax was repealed.
- A 20% deduction of qualified business income from certain pass-through businesses was created. Specific service industries, such as health, law, and professional services, are excluded from this deduction.
- The individual tax rates decreased anywhere from 0% (in the lowest tax bracket) to 6.6% (in the highest tax bracket). The bottom 90% of income earners would see less than a 2% increase in after-tax income, while the top 10% of income earners would see an increase between 2% and 5%, on average. Middle-income taxpayers will see an average tax change of less than $1,000, while the top 1% will get a tax break of $51,140. It’s been projected that over 80% of the total tax cut benefits will go to the top 1% of income earners.
- The standard deduction was almost doubled, but personal and dependent exemptions were eliminated.
- A small increase in the child tax credit.
- The estate tax exemption was doubled from $5,600,000 to $11,200,000.
- State and local tax deductions were capped at $10,000, with the double-whammy of sizeable tax increases for those living in highly taxed locales.
- Tax cuts for individuals (i.e. rates, increased child tax credit, and the higher standard deduction) will expire at the end of 2025. Tax cuts for corporations, however, are permanent.
- The Congressional Budget Office projects an increase in national debt of $1.8 trillion over the next 10 years as a result of the legislation.
On its face, this tax plan fails on who gets the bulk tax cuts (the highest income earners and corporations). That’s called “trickle down economics”. But it also fails from a fiscally conservative standpoint. It’s not revenue positive or even neutral. It will result in $1.8 trillion in new debt over the next 10 years and a massive decline in revenue from corporate taxation that will last indefinitely, (if not repealed by a future Congress).
The promise in the pitch to Americans was the trickle down. But is the plan actually trickling down to workers in the form of wage gains? The early results are not promising.
Shortly after the legislation passed, a number of companies announced $1,000 employee bonuses that now total more than $3 billion paid to workers. These bonuses (planned prior to or after the tax cut passed) were often attributed to the tax cut, and resulted in a flurry of positive PR for the plan. Give me an actual sustained wage increase over a one-time bonus any day, but any bonus is a good bonus, right?
Well, what hasn’t been in the news as much is where the rest of the corporate tax cuts are going. According to several estimates, corporations have already announced roughly $200 billion worth of stock buybacks this year – a dramatic increase over any previous full year. That’s a 67-to-1 ratio of stock buybacks versus worker gains.
Furthermore, 84% of corporate stock is owned by just 10% of Americans and the richest 1% own 40%. Why are corporations so fond of investing in stock buybacks versus workers? An analysis of the compensation of the 500 highest-paid executives found that stock-based gains accounted for 82% of their pay.
When it comes to the actual tax cut for workers, there was this infamous (now deleted) Paul Ryan tweet, celebrating the windfall that everyday Americans will enjoy from this plan:
$72 a year? Huh.
Oddly, the common defenses I’ve seen of this plan often follow some variation of this talking point.
“Every little bit helps.”
“Hey, it’s a little more money in my bank account.”
But this sentiment shows a lack of awareness of the bigger picture here. The thing is, this isn’t a free handout – you are being lent the cut from your future self. An apt analogy that I heard recently was,
“You go out for dinner with a wealthy acquaintance. “I’ll take care of everything,” he says, and orders you a hamburger. Then he orders himself an expensive steak and a bottle of wine, which he doesn’t share. And when the waiter comes with the check, he points at you and says, “Charge it to his credit card.””
Since this is not a revenue neutral tax plan, you’re not only going to have to pay back the pittance you’ll receive (with interest), but you’re also paying for the tax cut for the wealthy and corporations (who will most likely continue to pay lower effective tax rates than you in the future), with interest.
And in the meantime, the looming deficits will almost surely inspire the very same people who added to them when they voted for this tax plan to also call for Medicaid, Medicare, and Social Security cuts. So in addition to paying for yourself (with interest), your wealthy acquaintance, and his corporation, you could also see many of your essential benefits meet the axe.
Part of the insanity of all of this is that legitimate economists almost universally all believe that you should raise, not cut revenues, at times of full-employment and economic growth in order to cut budget deficits.
Yet here we are – building massive credit card debt, with a Costco membership in hand.
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Unfortunately, the bottom 90% are all too happy to have the upper 10% give us a crumb from their loaf of bread.
It’s a beggars dream; the crumbs that fall from their master’s table, as he regales them with his fake business acumen and a million other lies. There’s a sucker born every minute in this country, and the snake oil salesman loves stupidity.
While there’s some truth in your comment, let’s be clear – this is not Trump’s tax plan. Accordingly, I didn’t mention his name once in this post. This is the Congressional Republican tax plan. He signed this law, but he and his team wrote close to zero of it. The Republican Party is pulling off this heist – he’s just their unwitting accomplice.
Those who pay the most taxes get the most cuts. I’m getting 8K extra per year while my friend is only getting 2K. Some might say the systems favors the rich by those numbers alone but I pay a lot more taxes than her. You also can’t give cuts to the bottom X% who don’t pay taxes at all.
It’s easy to complain about tax cuts for businesses, but have you seen how many larger corporations are reinvesting in america again? Many places announcing plant openings in America as opposed to overseas. Long term, this plan will definitely help the economy.
It’s not just $-to-$ comparisons. Those who get the biggest cuts on a percentage basis are the wealthiest (both directly through lower individual tax rates and indirectly through corporate stock buybacks). The percentage cuts were regressive.
I’ve seen about a handful of businesses announce plant openings. It’s hard to say how many of those were planned prior to or after the announcement. Similar to Carrier (who is moving to Mexico after all, due to cheaper labor, not tax rates), the hype often doesn’t live up to the #’s. Are a few plant openings here and there worth the $1.8 trillion cost over the next 10 years? Highly doubtful.
So then what would have been the better solution? Tax the “rich” even more than they are now? They pay most of the taxes in this country anyway. Those are liberal ideas that haven’t really worked in the past. All it does is stagnate growth. More money in people and businesses hands is an investment that could be worth the cost 10 years from now. I’m not seeing how you’re fiscally conservative if you’re not in favor of that.
I worked in the govt for awhile and I’d much rather give money to industry to boost the economy rather than let the govt do it. Sadly the government is slow and ineffective when it comes to the economy. It’s is also not their job to create jobs. The best thing they could do is provide financial incentives and stay out of the way.
I highlighted that in my previous post with significant examples of how trickle down does not work. If you want to boost the economy with tax cuts, give tax cuts directly to people who spend them vs hoping it trickles down to them from those at the top and corporations (who use stock buybacks to enrich themselves or sit on it). And invest in people with infrastructure, health, and education. I don’t think that’s “liberal”, it’s just basic economics. Also, GDP growth has been significantly higher in decades when the highest marginal tax rates have been higher (they are at historical lows now and GDP growth is lower), so your analysis there is inaccurate.
“Those who get the biggest cuts on a percentage basis are the wealthiest”. That’s either flat out wrong, or the info I’m looking at is wrong. There’s a handy chart on this page that shows the largest percentage drops go to earnings under $175.5K (single) or $315K (joint). Care to explain? https://www.thebalance.com/trump-s-tax-plan-how-it-affects-you-4113968
You said it yourself, “percentage drops”. The absolute dollar amounts are much higher for the wealthy. Read the article you posted, it literally says that it helps the top 5th wealthiest.
I agree that in the short-term, this is a good thing for keeping jobs here. I haven’t heard many examples of companies either moving jobs here or not exporting them due to the sudden decrease of the corporate income tax but I’m sure some cases exist. Problem is that our unemployment rate is so low we’ll have trouble *filling* the jobs since we don’t have enough workers (we already had a record number of job openings), but a ton of job postings and ease of finding employment is probably a good thing for most workers.
“Long term, this plan will definitely help the economy.”
This is where I staunchly disagree. Long term this will cause us a ton of damage, due to how much it’s adding to the deficit. Eventually we’ll have to deal with it, whether through tax cuts, decreasing spending, or both. If we would’ve done that right now, with the economy in pretty good shape, we could’ve weathered the storm without too much damage. If we’re forced to do this during leaner times it could cause a lot more chaos. Take a look at Greece, or even individual states like Kansas or Oklahoma. High deficits combined with too-low taxes really harm the economy and eventually someone has to deal with it, and the solution is usually painful.
Totally agree. Just look at the teachers in West Virginia (a state that had slashed corporate tax rates). West Virginia teachers had to strike for weeks (illegally) to get their 1st pay raise in 4 years, and it’s 5% total over the next 4 years. That’s 5% total in 8 years – far less than keeping up with inflation. In Oklahoma (another state that slashed tax rates, during a period of huge oil/natural gas exploitation), the teachers haven’t had a raise there in 10 years, are paid the lowest in the nation, and school is only 4 days a week to cut costs. This is “cutting waste”?
When you slash taxes without replacement, you can’t/won’t pay essential workers like teachers (or pave roads, or fix bridges, etc.). After the West Virginia raise, Republicans said they would “make painful cuts elsewhere to pay for it”. Probably Medicaid (as the state is in a full-blown opioid crisis). It’s sadistic. And here we are – with 40% less funding from corporate taxes than a year ago. People need to stop inflicting pain upon themselves, with no gain.
I agree with your comment, but I would just add that you should look at where tax dollars are actually being spent (whether in a “low tax” or “high tax” state). Public pension debt and welfare/medicaid liabilities are growing much faster than any state’s tax revenue. As a millennial paying about 25% of my gross income to state and federal taxes, I would rather keep every last dollar and contribute to a roth IRA/401K and my HSA. I have no issue with paying taxes, but watching essential government services like police, teachers, and public works get cut when pension and entitlement liabilities continue to outpace growth is just insane.