The Cold Hard Facts about the TCJA

If you’re a regular reader of our newsletter, you know how often we talk about the Tax Cuts and Jobs Act (TCJA), which is former President Trump and Republicans’ signature tax bill from December 2017. And if you know how much we talk about the TCJA, you know how often and how loudly we say the package delivered a massive windfall to the ultra-wealthy and corporations.

We know we sound like a broken record on how much the TCJA disproportionately benefited the rich, but it bears repeating because many of the provisions of the TCJA expire in 2025. For this week’s Closer Look, we’re going to explicitly lay out how the TCJA delivered for the rich at the expense of the poor, so we’re all equipped with the cold hard facts ahead of the looming 2025 tax battle.

The TCJA implemented a number of changes to the tax code that benefited low-income households, most notably raising the standard deduction and doubling the value of the Child Tax Credit. But the fact remains that its largest provisions – among other things, slashing the corporate tax rate from 35% to 21%; reducing the top marginal individual income tax rate from 39.6% to 37%; doubling the estate tax exemption from $11 million to $22 million (for a married couple) – overwhelmingly worked in the interests of the wealthy. The end result? In 2025, the TCJA will boost after-tax incomes of households in the top 1% by 2.9%, while households in the bottom 60% will see a 0.9% increase. The top 1% will receive a $61,090 average tax cut while the bottom 20% of earners will receive a mere $70 cut. Former House Speaker Paul Ryan might applaud $70 as enough money for an annual Costco membership, but we don’t think it’s something to write home about when considering the windfall that the wealthy are reaping.

Republicans were not just playing financial games when they wrote the TCJA: they were cynically playing politics too. To comply with congressional budget rules, Republicans designed the TCJA in a way that made the corporate tax cut permanent and the individual income and estate tax provisions expire at the end of 2025. It shouldn’t come as too much of a shock that Republicans prioritized making the corporate tax cut permanent because this benefited the rich more than the income and estate tax cuts. In 2018, the first year that the law went into effect, the top 1% received 36.2% of the benefits from the TCJA’s corporate tax provisions and 16.8% of the benefits from the expiring individual provisions.

Republicans tried to sell the business tax cut portions of the TCJA to the public by claiming that these cuts would boost wages and grow the economy. Officials in the Trump White House predicted that they would lead to a $4,000 average boost in wages for American workers. But studies have found that the benefits of the TCJA corporate tax provisions have not, in fact, “trickled down” but instead remained concentrated in the hands of top corporate executives. One study by the Joint Committee on Taxation and the Federal Reserve Board found that workers in the top 10% of their firm’s earnings distribution, particularly C-suite executives and managers, experienced wage increases from the corporate tax rate cut, while workers below the 90th percentile experienced no wage gains whatsoever.

The massive reduction in the corporate tax rate is obviously bad, and President Biden and Democrats shouldn’t give up on their quest to raise it. But in the immediate term, they should focus on letting the individual income and estate tax provisions expire by the end of 2025 as scheduled. If they are extended, as former President and current GOP frontrunner Donald Trump has promised to do, they will give yet another unnecessary windfall to the wealthy: in 2026, the top 1% of households would receive an average $48,000 tax cut from the extensions while households in the bottom 60% would receive an average $500 cut. And if that wasn’t enough, the top 0.1% of households, i.e. those with incomes over $4.5 million, would get a $175,000 cut, which is 1.5 times the median income in all fifty states.

Important to note is that, as time has passed since the TCJA went into effect, the overall size of taxpayers’ cuts has gotten smaller. Earners in the top 1% have seen the largest decline in the size of their cuts, largely thanks to the expiration of a handful of business tax cuts that a bipartisan coalition of Democrats and Republicans are now trying to revive. Meanwhile, benefits for low- and middle-income taxpayers have slightly declined over the last six years primarily because the TCJA indexed tax parameters – e.g. the standard deduction, tax brackets, tax credit thresholds – to the chained-weighted consumer price index, which is considered by some to be a more accurate measure for cost of living than the traditional consumer price index but tends to understate the actual inflation rate and, therefore, typically increases at a lower rate than the consumer price index.

After 2025, when the individual provisions of the TCJA expire, the majority of taxpayers at all ends of the income spectrum will face hikes on their federal tax bills. Top earners will still see benefits from the corporate tax cut, but by 2027, the increase in the individual income tax will overpower these benefits and slap them with a higher tax bill. One could argue that Republicans in 2017 specifically designed the TCJA in this manner – large tax cuts at the beginning with Republicans in control of the White House, Senate, and House; tax increases in the future with Democrats potentially in office – to shore up their political fortunes, but let’s not go there.

To be clear, the Patriotic Millionaires do not want low- and middle-income taxpayers to face tax hikes. There are parts of the TCJA that benefited economically disadvantaged families, like the increased standard deduction and Child Tax Credit, that should be extended and expanded. It’s just rich people like us that we think shouldn’t be getting tax cuts, particularly ones of the magnitude that the TCJA gave us.

That said, come next year, Congress should let the most regressive individual provisions of the TCJA expire and keep and expand the tax relief portions of the bill that benefited working people. But they shouldn’t stop there. They should seize the opportunity to rewrite the entire tax code, which is desperately needed. The Patriotic Millionaires have a roadmap for doing just that: Crack the Code 2.0. The abridged version? Don’t bother rearranging deck chairs on the Titanic: rewrite the tax code to help working people, not the ultra-rich.

Yes, we’ve already made plenty of noise about the Tax Cuts and Jobs Act. But we should warn the world right now: we’re going to keep making noise all the way through 2025, when Congress will have a choice to make. Will it acquiesce to a Second Gilded Age of spiraling inequality, or unrig the tax code and save America? The stakes really are that high. 

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