Opponents critical of Republicans’ federal income tax cuts said they are economically “regressive” and benefit the wealthy disproportionately. That’s not the case, according to researchers who analyzed the reform measure over the long term.
Produced by Boston University economist Laurence Kotlikoff, University of California, Berkeley professor Alan J. Auerbach and Darryl R. Koehler of the Fiscal Analysis Center for the Goodman Institute for Public Policy Research, the study applied a new set of tools and a data-driven model to expand on the analysis of the Tax Cuts and Jobs Act of 2017.
From a broad-based, long-term perspective, the 2017 tax reform package supported by President Donald Trump and congressional Republicans was small and essentially in line with previous tax cuts in regard to how benefits are distributed across economic classes, according to the study.
By and large, the benefits are distributed proportionally — everyone gains a bit in terms of income after federal taxes, Kotlikoff told Watchdog.org.
According to the study results, the highest-earning 20-year-olds — the top 1 percent, for example — would receive just 4.05 percent of the benefits of the federal tax cuts among their peers. About 6.54 percent of the benefits would accrue to the top 1 percent of 40-year-olds, according to the study, which analyzed different income brackets within specific age groups over their lifetime of expected earnings.
The results stand in stark contrast to a June 2018 study by the Brookings Institution’s Tax Policy Center, which concluded that 82.8 percent of the benefits from Trump’s tax reform would accrue to the highest-income Americans. Furthermore, the Tax Policy Center’s own numbers show that if the federal income tax cuts were made permanent, the top 1 percent of income-earners would receive 25.3 percent of the benefits, the Goodman Institute highlights.
The discrepancy between the results of the Tax Policy Center and Kotlikoff and colleagues studies lies in the methods and tools the Tax Policy Center and others use to analyze and forecast the effects of tax cuts and new policies. They are static and outdated and fail to provide a complete, accurate assessment of the tax cuts’ effects as income and wealth levels change over time, according to Kotlikoff.
More specifically, Kotlikoff points out that they:
• Look only at income and ignore wealth.
• Focus only on current income, ignoring how tax reform will affect income over the course of people’s lives — from entry-level wages to peak earnings and on to levels at retirement.
• Treat people with the same current incomes the same no matter what their age — 20, 50 or 80.
• Ignore the interaction of tax reform on the seven largest entitlement programs, including Social Security and Medicare.
Kotlikoff and colleagues used a new set of tools and included additional parameters, such as changing income levels and wealth over the course of people’s lives, to analyze the data and determine the likely effects of the 2017 federal income tax cuts. Their findings contradict those of the Tax Policy Center and other forecasts.
According to the study, the lifetime benefits of the tax cuts would be worth more than $20,000 for an average-age household earning the national average income even if there were no economic growth. That rises to between $60,000 and $70,000 given Kotlikoff’s and colleagues’ forecast for economic growth.
More specifically, among people in their 20s, 52 percent of the benefits of tax reform will go to the broad middle class. Among people in their 40s, 42.8 percent of the benefits will go to the middle class.
Other studies of the effects of the federal income tax cuts enacted late last year conclude that they will benefit middle and lower income Americans, as well as higher income earners and businesses, Jim Tobin, president of Illinois-based Taxpayers United of America, told Watchdog.
“Businesses will be able to hire more employees, and use some of the tax relief to invest in capital stock,” Tobin said. “That’s a source of economic growth that benefits everyone.”
The economic stimulus the tax cuts provide is being watered down as a result of Trump’s actions regarding international trade, more specifically the imposition of import duties and tariffs, according to Tobin.
“Unfortunately, Trump’s support of import tariffs decreases the positive effects of the federal income tax cuts — by one-third, according to a Tax Foundation report released this week,” he said.
Import duties and tariffs raise the costs of imported goods and raise consumer prices, Tobin said.
Taxpayers United supports the federal income tax cuts wholeheartedly, however, he said.
“It has been good for the country — the stock market is booming, businesses are expanding and unemployment is down to record lows,” Tobin said. “In fact, we need more workers to fill all the open positions available.”
The findings from Kotlikoff’s study aren’t surprising, he continued.
“The tax cuts will benefit everyone,” Tobin said. “Some will have more disposable income to spend. Some will save on capital gains taxes, and some will receive raises or find jobs as a result of the economic stimulus.”
A version of this article previously appeared on Watchdog.org under the headline “Study: Everyone gains from 2017 Trump-Republican tax cuts, not just the wealthy.”
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