The old formula for passing a big tax cut for the rich was simple: Package it with a modest tax cut for the middle class – and talk endlessly about the middle-class part.
President Donald Trump and Congress are following the formula in some ways. Their plan would deliver an average tax cut of $700,000 to the nation’s 175,000 richest families. That’s enough for each to buy a new 50-foot yacht, annually. Meanwhile, Trump and other Republican leaders keep repeating “middle class,” “middle class,” “middle class.”
Yet there is also a major difference between the current plan and George W. Bush’s tax cut or Ronald Reagan’s. Trump’s plan would not actually cut taxes for many middle-class families. It would raise them.
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These families are in the minority, yes. But there are a lot of them. About 17 percent of households earning between $50,000 and $150,000 would see their taxes rise immediately, according to the only rigorous analysis so far, by the Tax Policy Center. Among households earning between $150,000 and $250,000, the share is about 35 percent.
These numbers would grow over time, for reasons I’ll explain. Ultimately, the plan would be likely to hurt the finances of the vast majority of Americans. No wonder it is starting to look politically vulnerable. Last week, a precursor bill barely passed the House, receiving 20 no votes from Republicans, many worried about the tax increases.
Republican leaders certainly have a path to passing a tax bill, because nothing unites modern Republicans the way a tax cut does. But the opposition to the recent health care bills also started as an underdog and managed to prevail, by relentlessly talking about the bills’ effects. When enough Americans understood the truth, enough members of Congress felt pressure to vote no.
The same could happen on taxes. It is starting to. Recent polls suggest the plan’s approval rating is only about 30 percent.
To understand the Trump tax increases, you should first acknowledge the most admirable feature of his plan. It doesn’t aspire to be merely a tax cut. It aspires to be tax reform – both cuts and increases. Some deductions shrink, while rates fall, in the name of simplifying the tax code.
But after this promising start, the plan commits its cardinal sin. It places the highest priority on huge tax cuts for the very wealthy. They get lower rates andget to keep cherished tax breaks, like the “carried interest” loophole. Herbert Hoover’s Republican Party wanted to put a chicken in every pot. Donald Trump’s wants to put a yacht at every private dock.
Having lavished so much money on the wealthy, the tax package – or at least the vague framework that the administration has released – doesn’t have much remaining to spend on middle class and poor families. For them, the package is a mix of pluses and minuses. Many face a lower tax rate, but some face a higher one, and many families lose deductions.
The combination creates a lot of losers. Reduced deductions for children, for example, hurt large families, notes NYU’s Lily Batchelder. And the deduction for state and local taxes – also a target for cuts – now benefits 30 percent of households nationwide. It was the main reason for last week’s House defections, and the tensions over it haven’t been resolved.
Then there are the long-term problems I mentioned earlier. First, Trump’s plan takes a skimpy approach to inflation adjustments, which will push many families into higher tax brackets over time. Second, the plan would radically increase the federal deficit, and when it comes to the deficit, what goes up must eventually come down. At some point, the government will need to pay its bills, through a combination of tax increases and spending cuts.
Virtually any future deficit-reduction plan – except for a repeal of the Trump tax plan – would hurt most families more than his plan helps them. This chain of events has happened before. The Reagan and Bush tax cuts may have at first seemed to help the middle class and poor. But the deficits led to later cuts in education, medical research, transportation and anti-poverty programs that almost surely erased the benefits of a modest tax cut. Already, today’s congressional leaders are talking about sizable cuts to Medicare and Medicaid.
Trump and his allies are feverishly trying to claim their plan really would benefit the middle class. Their latest talking point is the notion that corporate tax cuts will create an indirect windfall for workers. Funny, though, how the wealthy get most of the direct benefits, while everyone else has to hope for indirect ones somehow to materialize.
The main lesson of this year’s health care battle was the political power of facts. They don’t always win the day, but it’s better to have them as an ally than an enemy. Right now, facts are the biggest problem for Trump’s tax plan.