The Republican tax bill is a disaster for income inequality

Chris Kleponis-Pool/Getty Images

Republicans have managed to take a tax plan that was already tilted heavily toward corporations and the wealthiest Americans and shift the balance even further in favor of the rich.

The story of the Republican tax overhaul has been its pinpoint targeting of the biggest benefits to the rich and to businesses. As Alvin Chang and I wrote previously, America is in the midst of a shift toward extreme income and wealth inequality. The GOP tax plan would make that problem — and most Americans regard it as a major problem — even worse.

The bill’s most enduring feature is a $1 trillion permanent corporate tax cut. It also slashes tax rates for people making more than $1 million and for pass-through companies disproportionately utilized by the wealthy, and it rolls back the estate tax on wealthy heirs and heiresses.

While the tax bill also nearly doubles the standard deduction and expands the child tax credit, which should help many lower-income families, independent analyses have consistently found that the bill would cut taxes more for people with higher incomes than for people lower on the economic ladder.

That trendline hasn’t improved as Republicans have tinkered with their tax plan. Ernie Tedeschi, a former Treasury economist under President Obama, ran the numbers and found that the final tax plan Republicans passed this week is actually even more tilted toward people making six figures or more than its predecessors.

Ernie Tedeschi
Ernie Tedeschi

That’s in the short term. Almost everybody does get a tax cut, though people with higher incomes will keep more of their money.

But in the longer term, unless the individual tax cuts are extended, almost all of the bill’s gains accrue to the richest people. (The cuts currently expire in 2025 to comply with the Senate budget rules; Republicans have pledged that they will be reauthorized.)

The Tax Policy Center found that 83 percent of the tax cuts in 2027 would go to the top 1 percent, as Vox’s Dylan Matthews covered Monday, up from 62 percent in the bill previously passed by the Senate.

Tax Policy Center

When I surveyed economists earlier this month, they unanimously agreed that the GOP tax overhaul would likely make income inequality worse.

“The bill is investing heavily in the wealthy and their children — by boosting the value of their stock portfolios, creating new loopholes for them to avoid tax on their labor income, and cutting taxes on massive inheritances,” Lily Batchelder, a New York University professor who worked as an economist under President Barack Obama, told me of earlier versions.

“At the same time, it leaves low- and middle-income workers with even fewer resources to invest in their children, and increases the number of Americans without health insurance.”

Or as William Gale, co-director of the Tax Policy Center who served as a senior economist under President George H.W. Bush, put it succinctly then: “It exacerbates preexisting and longstanding trends, rather than aiming to partially compensate for them.”

If anything, that has only become more true as Republicans have finalized the details.

Income inequality was already growing in the United States

The top-earning Americans have always earned the lion’s share of income in this country. But in the past half-century, more and more of that income has gone to the top.

From 1979 to 2013, the share of after-tax income held by the top fifth of earners has grown by 6.5 percentage points, while the share held by the bottom fifth has dropped by 1.2 percentage points:

If we home in on just the top 1 percent, this group has seen an especially large growth in income share since the 1980s.

This is a group that will benefit greatly from the Republican tax bill because it slashes the corporate tax rate, cuts taxes for pass-through businesses, lowers the top individual tax rate, and includes other provisions like rolling back the estate tax on large inheritances.

The corporate tax cut in particular, the centerpiece of the bill, will benefit the wealthy, who earn far more of their income from business and investments than other Americans.

Republicans slashed taxes for pass-through businesses, which are increasingly used by the wealthiest Americans to lighten their tax burden. These pass-through businesses earn more than traditional corporations.

And the top 1 percent earned more and more money through pass-through businesses, which helped them earn a bigger share of the pie.

This is why most of the money earned through pass-through businesses goes to the top 1 percent, including the Trump Organization. Those businesses would also see their taxes cut under the Republican tax bills.

Americans know income inequality is getting worse, and they want it fixed

The American people have noticed these trends: more and more of the nation’s wealth accumulating with the richest people. Democrats and Republicans agree on this.

Most of them think it needs to be addressed imminently. A 2015 New York Times poll found 65 percent thought the growing gap between the rich and the poor needed to be addressed immediately. Only 17 percent said it wasn’t a problem.

A majority of Americans think that taxes should be raised on corporations, and a plurality support raising taxes on people with higher incomes.

But the Republican tax bill, despite Trump’s promises to present the forgotten Americans, doesn’t do either of those things.

Instead, it would dramatically reduce taxes on corporations and pass-through businesses — businesses the top 1 percent gets a large part of their income from. The bill’s individual tax cuts would also largely benefit the wealthiest people.

The GOP is betting that tax cuts for the rich and businesses help everyone

The Republican counter to these arguments would be that a big corporate tax cut would benefit everybody, because businesses would then invest more money in the economy, increasing wages and employment for all of us.

But our already worsening inequality belies this argument. As Emmanuel Saez and Gabriel Zucman, economics professors at the University of California Berkeley, wrote:

Republicans will noisily claim that cutting taxes on wealthy business owners will boost economic growth and end up benefitting workers down the income ladder. The idea is that if the government taxes the rich less, the wealthy will save more, grow U.S. capital stock and investment, and make workers more productive. The evolution of growth and inequality over the past three decades makes such a claim ludicrous. Since 1980, taxes paid by the wealthy have fallen dramatically and income at the top of the distribution has boomed, but gains for the rest of the population have been paltry. Average national income per adult has grown by only 1.4 percent per year—a poor performance by both historical and international standards.

As a result, the share of national income going to the top 1 percent has doubled from 10 percent to more than 20 percent, while income accrued by the bottom 50 percent has been almost halved, from 20 percent to 12.5 percent. There has been no growth at all in the average pretax income of the bottom half of the population over the past 40 years—during which trickle-down enthusiasts promised just the opposite. Now they’re doing it again. Will we listen?

And if you step back and look at the ways the Republican tax bills could reshape American society and the world, the risks for deepening inequality rise.

It starts, as always, with the massive corporate tax cut at the heart of the bill. The global implications are profound, Saez said in an email.

“At the global level, it implies that the US has renounced the idea of taxing multinationals properly. It will accelerate the trend toward lowering corporate tax rates around the world,” he said. “This means that the gains from globalization will skew even more toward wealthy multinational shareholders instead of the public. This is the reverse of what we need at a time of populist backlash against inequitable gains from globalization in advanced economies.”

The simple truth of the Republican tax bill is it is built on a premise — cutting taxes for the top of the economic chain will eventually yield benefits for everybody — that is contradicted by the past three decades of experience.

Rather than reverse those trends, as many Americans have said they want, the Republican tax plan floors the gas pedal on America’s already dramatic income inequality.

“The bill makes the economic playing field even more tilted toward the most fortunate,” Batchelder said, “which means over time the distributional effects of the bill will be even worse than these estimates suggest.”

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