At a recent rally in Montana, President Trump
claimed that “Republicans passed the biggest tax cuts in American history, the biggest in American history. Everybody in this room is better for them. Everybody is better for them.”
Unfortunately, this isn’t true. Everybody is not better off from the recent tax cuts, which have only served
to increase the federal budget deficit—now $779 billion for FY 2018 according to new data released by the Treasury Department. To be sure, the middle class gets help temporarily, but over the longer run, the middle class will be worse off.
The middle class is seeing slower income growth than both the rich and the poor
This fact is made all the more egregious in light of evidence that the middle class isn’t doing well and needs help. Stagnating incomes, opportunity gaps, and fragile families are all reasons to
worry about the middle class. Public policy has done little to ameliorate these concerns. After accounting for taxes and transfers, growth in average middle-class household incomes has lagged significantly behind the lowest and, especially, the highest income quintiles. Incomes of the top 20 percent rose by 97 percent from 1979-2014—over twice as much as middle-class incomes. Even the lowest quintile has seen faster income growth, 69 percent, or two thirds higher than income growth for the middle class. In short, both public policy and the economy are leaving the middle class behind.
The 2017 tax law doesn’t help the middle class
The new tax law—known as the Tax Cuts and Jobs Act (TCJA)—will exacerbate this trend. The benefits of the law tilt toward the well-off both now and in the future, according to the distributional
analysis of the Tax Policy Center. By 2027, benefits of the tax law flow entirely to the rich. (The Joint Committee on Taxation finds similar
results using a different measure.)
To be fair, Republicans hope to extend the tax law beyond 2027, but that’s highly
unlikely. There is also an argument that increased investment will lead to higher wages in the long run. The
theory is that the lower corporate rate and temporarily expanded business expensing will spur investment in the United States, leading to more capital, and more productive workers. As worker productivity rises, firms will boost wages. All of this would happen gradually over the long term.
However, the evidence for this story about long-term growth is weak at best. According to
two leading economists, one liberal and one conservative, annual GDP growth might rise by 0.02 percentage points over the next decade. So far, corporations are using their added profits primarily to
buy back shares and boost dividends, not to invest. In addition, rising productivity in recent decades has
not been fully shared with workers, suggesting a less competitive economy than many assume. Finally, deficit-financing means that middle-class households will likely be hit with big tax increases or spending cuts later and interest rates will rise in the interim as government borrowing explodes. While revenue-neutral, pro-growth tax reform (rather than costly tax cuts) is
possible and desirable, the TCJA falls far short of this standard.
Isabel Sawhill and Christopher Pulliam look at how President Trump's recent tax cuts will hurt the American middle class in the long run.
www.brookings.edu
