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How Trump’s tax cuts could wind up hurting most Americans

House Speaker Paul Ryan and his postcard tax plan
House Speaker Paul Ryan and the “postcard” he says tax reform will let Americans do their taxes on.
Paul Ryan
Dylan Matthews is a senior correspondent and head writer for Vox's Future Perfect section and has worked at Vox since 2014. He is particularly interested in global health and pandemic prevention, anti-poverty efforts, economic policy and theory, and conflicts about the right way to do philanthropy.

We don't know a lot of details about President Trump's tax plan, but we do know it's expensive, in terms of lost revenue for the federal government. Paying for it could very well mean cutting programs that Americans rely on, leaving most of the country worse off than before the tax cuts.

The independent, nonpartisan Tax Policy Center estimated last month that the cuts Trump has proposed — including slashing the corporate tax rate from 35 to 15 percent, getting rid of the estate tax, and cutting the top rate for individuals from 39.6 percent to 35 percent — would cost as much as $7.8 trillion over 10 years. And they’re overwhelmingly targeted at rich Americans and corporations.

Trump’s team has given little sense of how they might raise other revenues to offset that cost. That ambiguity poses big problems. Not paying for the cuts at all would increase the US debt-to-GDP ratio by about a third or more come 2027. Bills that increase the long-run deficit are impossible to pass through budget reconciliation with a simple Senate majority, so this option would almost certainly doom the tax bill in the Senate.

Republicans could change other tax provisions to fund the rate cuts, but the Tax Policy Center estimated a few options that the Trump team has hinted they might include, like eliminating all tax deductions except on charitable giving and mortgage interest, and found that including them only brings the total cost of the tax cuts down to $3.5 trillion.

That leaves spending cuts as the last viable option to fund the tax plan — an option favored by conservatives in the House, at least. There’s a problem with that plan, though, which the TPC highlights in a new study: Those spending cuts could result in the overall tax plan hurting the vast majority of Americans, to benefit the rich. The cuts, as it is, don’t do much for anyone but the rich, but on their own they don’t hurt the middle class. If they’re funded by spending cuts, they will.

Trump hasn’t put out any specifics as to what spending he’d be willing to cut to fund tax cuts. So TPC's William Gale, Surachai Khitatrakun, and Aaron Krupkin first assume that he includes all plausible tax pay-fors, bringing the total cost down to “only” $3.5 trillion, and then present a number of options for how the burden of the spending cuts could be distributed:

  1. Spending could be cut for every household equally. In 2018, paying for the tax cuts would cost $2,290 per household. This option assumes that federal spending is cut in such a way that the burden is literally equally distributed, with every household receiving $2,290 less benefit from government spending.
  2. Spending could be cut so that the burden is proportional to a household's income. Funding the tax cuts would cost, on average, 2.5 percent of each household's income in 2018. This option assumes spending cuts that match that: so someone making $20,000 a year would see $500 less in government spending go their way, while someone making $1 million would get $25,000 less in spending, and so on.
  3. Spending could be cut in a way that’s proportional to individuals' income taxes. Since income taxes are progressive, and many low-income Americans don't pay them at all, this would entail little or no spending cuts that hurt the poor, and a much heavier concentration of cuts harming the top 1 percent.

I should say that the first of these options is, by far, the most likely. The US doesn’t spend a lot of money directly on rich people; our benefits to the affluent tend to come through the tax code, through provisions like lower rates on capital gains, or the mortgage interest and charitable deductions. That makes scenario three, which assumes massive cuts to spending programs that benefit the rich, a bit fanciful.

More to the point, Republicans’ efforts to cut spending have focused almost exclusively on programs for the poor, like Medicaid or Supplemental Security Income or food stamps. Trump’s budget proposal includes $2.1 trillion in cuts to Medicaid, Affordable Care Act subsidies, food stamps, Social Security Disability Insurance, Supplemental Security Income, and cash welfare (TANF). That would go a long way toward paying for tax cuts, and its impact would be even more concentrated on the poor than in scenario one, where spending is cut equally per capita.

Gale, Khitatrakun, and Krupkin find that the overall distributional impact of the tax cuts depends wildly on which of the scenarios they considered occurs.

If the costs of Trump’s tax cuts were distributed across all households. Tax Policy Center

If spending cuts are distributed equally across all American households regardless of income, then the tax plan winds up making 84.4 percent of Americans worse off, including virtually everyone in the lower or middle classes. It's not until you reach the top 10 percent (households making $216,800 or more) that the tax cuts start outstripping the spending cuts for most households. Middle-class households would lose $1,540 on average, while the poor would lose $2,250 each. The top 1 percent, by contrast, would get an average boost of $172,250, and the top 0.1 percent (making $3.4 million or more a year) would get $935,410 each.

Recall that this is the scenario that arguably matches the spending cuts already proposed by Trump and his team most closely.

Paying for Trump’s tax cuts with a flat, percentage-of-income equivalent cut to spending. Tax Policy Center

Making the spending cuts proportional to income is barely any better. It eases the pain on poor families a bit, but they’re still worse off. Moreover, the situation gets bleaker for upper-middle and even some upper-class families; most people making six figures would be worse off. Literally only in the top 1 and top 0.1 percent would more households see more tax cuts than spending cuts. And their benefits would be tremendous: The top 0.1 percent would get a $674,380 windfall on average.

Distributing the cost of the tax cuts according to existing tax burden. Tax Policy Center

Making the cuts proportional to income tax burden leads to weirder results. The bottom 60 percent of Americans are made a little better or a little worse off, without a lot of big differences. But the upper middle class starts to see a majority of households getting hit with bigger spending cuts than tax cuts. Nearly two-thirds of households in the 80th to 95th percentiles (earning $149,400 to $307,900 per year) are made worse off, and those who do find themselves worse off lose $4,000, even more than $6,000 per year.

But the rich, as ever, do pretty damn well. While some rich and ultrarich households find themselves worse off, most benefit. The average benefit to the top 0.1 percent is $309,960 — not as much as the other options, but not too bad either. And that figure averages together households that lose with ones that gain. Looking at just households that gain, the average benefit is $669,220.

Again, this is likely an optimistic assessment. All indications are that the spending cuts Trump is considering would be much more regressive than any of the scenarios the Tax Policy Center modeled. And the cuts would be deeper still if the tax “pay-fors” assumed in this analysis don’t hold. If Trump doesn’t actually want to get rid of the state and local tax deduction, then the total cost of the tax plan goes up, meaning even more spending cuts.

If Trump does go this route, and tries to fund tax cuts with spending cuts, the result could be legislation that’s an even bigger upward redistribution of income from the poor to the rich than his failed health care bill.