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At the end of 2017, President Trump signed into law one of the largest tax code overhauls since the 1980s. The President assured taxpayers that this bill included a simpler and more reformed tax code, protection for lower- and middle-income Americans and cuts for corporations that would in theory spur investment and economic growth. Once implemented, however, this bill disproportionately benefited higher earners, created loopholes for profitable corporations, increased the federal deficit and did not deliver the high economic growth it promised, rather staying in line with previous economic projections.
On December 22nd, 2017, the Tax Cuts and Jobs Act of 2017 was signed into law. Republican lawmakers hailed this bill, steadfastly arguing supply-side economics assure that this would be a tax code that would spur investment and economic growth (Floyd). Yet, supply-side economics is a theory that does not have solid backing with economists. Despite this backing, it is still consistently used as support for major tax cuts. This theory suggests that tax cuts have a multiplicative effect that will eventually create enough revenue to pay for the loss of federal income. A multiplier is something that once changed will create more changes in other economic factors. In this context, this means that it was expected that cutting taxes would increase all American’s after-tax income (Hayes). With this income, they would spend more, corporations would increase investments, spurring economic growth and eventually creating enough revenue to somehow make up for the cut to federal income. However, this is only effective if tax rates are high enough that they can be considered ‘prohibitive’. Essentially, unless tax rates are reaching heights of 90-100%, cutting them will not have the multiplicative effect suggested by supply-side theory (Amadeo). The justification for the tax cuts of 2017 is therefore inherently flawed because before the tax cuts, rates were not in this range.
Moreover, this bill was advertised as protection for lower income and middle-class Americans. In practice, the TCJA created permanent tax cuts for corporations, while only temporarily reducing individual rates (Floyd). The TCJA created a flat tax rate of 21% for corporations while also getting rid of the individual mandate for health coverage enacted during the Obama administration. As a whole, tax cuts for corporations benefit shareholders, who tend to be of a higher income level. Additionally, the removal of the individual mandate will end up decreasing the federal deficit by an estimated $338 billion, but leave about 13 million Americans uninsured and increase insurance premiums overall.
In terms of individual rates, the Tax Policy Center released a report that states 80.4% of households can expect to see an increase in after tax income. However, this increase is distributed unevenly. While 93.7% of taxpayers in the highest earning bracket will see these benefits, only 53.9% of those in the lowest bracket will have an increase in after tax income (Floyd). All of these factors illustrate that the tax cuts will disproportionately benefit higher earners, while leaving behind lower- and middle-income households. In fact, this past year was the first time that the “400 wealthiest Americans actually paid lower total tax rate than any other income group combined” (Leonhardt). Furthermore, this tax bill worsens the growing income inequality in the United States. As demonstrated in the graphs, the top income groups have begun to pay less and less in total taxes since 1950. The consequences of these choices are that the United States is moving towards a regressive tax system in which taxes are applied at the same level regardless of income, and effectively taking more from low-income earners than from high income earners (Kagan). It is evident that the architects of this bill did not write the law with the intent of alleviating middle- and lower-income tax burdens.
Furthermore, one of the main goals, or at least advertisements, of the TCJA was the idea that it would reform and simplify the tax code. In practice, however, this bill ended up creating more loopholes for large corporations. In a study done by the CRS, it was found that the statutory tax rate dropped by 40% while the effective tax rate dropped by 48%, which indicates that the law actually gave corporations opportunities to argue their way out of taxation, showing more corruption rather than reform (Gardner).
In terms of the macroeconomic effects of the TCJA, this bill radically increased the deficit on a static basis, stayed in the predicted ranges of GDP growth rates prior to enactment, did not increase wages at the same rate as the GDP, and kept investment rates stagnant. The Committee for a Responsible Federal Budget found that the TCJA will add an estimated $230 to the federal debt this year and $1.9 trillion in the coming decade. While lawmakers had argued that this bill would ‘pay for itself’, the Congressional Research Service found that so far it has only paid for about 5% of its total costs. The Congressional Research Service also found that the economy grew by 2.9 percent the year after the law was put into effect. However, this was the projection made by the Congressional Budget Office long before the bill was passed, indicating that this bill did not surpass Congress’s expectations for the economy before taxes had been reduced. Additionally, wages grew less than the GDP. More importantly, wages grew at an even slower rate for workers in production and non-supervisory positions, indicating that the tax cuts disproportionately benefited higher earners. Finally, it is believed that the tax cuts initially boosted investments by about .75%. However, monetary policy was tightened and therefore could have reduced investment rates by about 25%. Trade wars with China also decreased investment rates by an estimated 25% (Furman). All of these effects roughly cancel each other out, showing no long-term changes to investment rates that the bill had originally been passed to stimulate.
Overall, the TCJA was less successful than its biggest supporters had projected it to be. This bill was marketed as a victory for lower- and middle-income Americans, when in reality they for the most part benefits corporations and higher income households. Additionally, the ‘reform’ that it was supposed to be ended up creating even more loopholes for corporations to pay less in taxes. And, the idea that these tax cuts would ‘pay for themselves’ has not yet held true, with only 5% of costs being covered, increasing the deficit now and over the next decade. Throughout the past 50 years, the United States tax system has consistently become less progressive, with higher earners often paying a lower rate than their middle- and lower-income counterparts, and the TCJA is no departure from this trend.
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