The Great Middle-Class Tax Cut

The Great Middle-Class Tax Cut
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Congressional Republicans are hard at work trying to produce a law that not only provides a large middle-class income tax cut, but also provides substantial tax reform. Although it will be a few days before even the basic framework is in place, it’s not too soon to ask whether their plan is likely to meet these two goals.

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In addition to improving the economic lot of the middle class, Republicans are hoping to introduce major tax reform by making the Internal Revenue Code more transparent and easier to use.

The most far-reaching change will be the lowering of the tax rate paid on the profits of our largest corporations from 35 percent to 20 percent. This should make American goods and services much more competitive in the global economy.

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But this tax cut is also being touted by Trump Administration officials for inducing a substantial wage increase for the middle class.

The prime beneficiaries will be the corporations themselves, who will get to keep much more of their profits.  They will also see a substantial increase in profits as their sales rise. And since most corporate stock is owned by the rich, they too will be handsomely rewarded.

However, according to Congressional Republicans as well as White House economic officials, another major beneficiary of the corporate income tax cut will be the American middle class. The income of the average family will rise approximately $4,000 to $9,000 a year.

Will large corporate employers share much of their new-found gains with their employees. Cynics would answer “no!”

But in a period of full employment – the nation’s unemployment rate fell to just 4.1 percent in October – employers will use some of their rising profits to retain current workers and attract new ones.

So, if the corporate income tax rate were lowered from 35 percent to 20 percent, surely some of the resulting profit windfall would be shared with employees. The big question is: How much?

We don’t really know. Still, estimates in the $4,000 to $9,000 range are certainly on the high end among economists who have expressed opinions. In conclusion, it may be a stretch to call the proposed corporate income tax cut a major boon to the middle class.

Basically, the corporate income tax cut is the most recent iteration of the old, largely discredited trickle-down phenomenon. First introduced by Republican President Ronald Reagan in 1981, we had a massive personal income tax cut, most of which went to the rich. Some of the benefits were expected to tickle down to working class and middle-class Americans. They’re still waiting.

And then too, in 2004, President George W. Bush induced Congress to allow large multinational corporations to repatriate $363 billion dollars of profits that had been earned and held abroad. They paid a tax of just 5.25 percent.

The president billed this as a “jobs program” because he expected these companies to invest the money in more plant and equipment, and to hire more workers. The companies used perhaps three quarters of the money to buy back their own stock, pay dividends to their stockholders, and buy other companies. Virtually no new jobs were created.

So, is this deja-vu all over again? Now the massive corporate income tax cut is being billed not as a jobs program, but as a substantial transfer of money to middle-class employees. Will enough money trickle down to these workers to justify the tax cut? You’re certainly free to reach your own conclusion.

Moving right along, let’s consider how Republican proposals would constitute tax reform. Perhaps the most far-reaching tax reform would be to simplify the tax code. Toward that end they have made four major proposals.

First, they want to change the number of personal income tax brackets – and corresponding tax rates – from seven to just four. But the seven brackets and corresponding rates were never a problem. This consolidation might save the average taxpayer or tax preparer about five minutes.

A second major reform would nearly double the personal income tax standard deduction for individuals and married couples who don’t itemize their tax returns. This measure will induce additional millions of taxpayers to stop itemizing and switch to the “short form” tax return, which would greatly simplify paying their taxes.

A third reform under consideration is eliminating – or at least limiting – some personal income tax deductions such as healthcare costs, mortgage interest, and state and local taxes. This would indeed make it much easier for millions of Americans to file income tax returns. But of course, if it were your deductions that were being cut, you might not be especially impressed with this particular type of tax reform.

A fourth reform would be the abolition of the alternative minimum personal income tax. Originally aimed at multimillionaires who paid little or no taxes, this tax attempts to make them pay at least 26 percent of their income in taxes.

But in recent years, many upper middle-class families – or their tax preparers – have been forced to fill out amazingly complicated forms to determine if they must pay this tax. Abolishing it might provide a windfall to the rich, but it would also make a lot of other folks happy as well. And this would certainly be a very substantial tax reform.

It would appear, then, that the tax measures now be considered in Congress would provide a certain measure of tax reform. But our tax code will remain such a convoluted mess that Americans will continue to employ three million people to prepare their taxes.

Let’s ask ourselves this question: If the proposed tax legislation will deliver neither a large middle-class tax cut nor substantial tax reform, then what’s the big rush to pass this bill before the end of the year? Also, since such lofty legislative goals would surely have already attracted at least some support among Congressional Democrats, could it be that this Republican initiative isn’t really that much about tax reform or a middle-class tax break at all?

Could it be that Congressional Republicans – not to mention President Trump – are increasingly anxious about heading toward the 2018 election without having fulfilled even one of their 2016 election campaign promises?

About the Author

Steve Slavin has a PhD in economics from NYU, and taught for over thirty years at Brooklyn College, New York Institute of Technology, and New Jersey’s Union County College. He has written sixteen math and economics books including a widely used introductory economics textbook now in its eleventh edition (McGraw-Hill) and The Great American Economy (Prometheus Books) which was published in August.

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