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A Project of The Annenberg Public Policy Center

A Tax Hike or Benefit for the ‘Middle Class’?

House Minority Leader Nancy Pelosi claimed that the Republican tax cut plan “raises taxes on [the] middle class,” while President Donald Trump claimed that “everybody’s gonna benefit” from a plan that “is for the middle class.”

Which is it? Some in the “middle class” — however we might define that — would see higher taxes, but others would see a tax cut, according to an analysis of the GOP framework by the Tax Policy Center. The president is wrong to say everybody would benefit, while Pelosi ignores that most taxpayers in the group she considers the “middle class” would see a tax cut.

The president also said that the tax plan “ensures that the benefits of tax reform go to the middle class, not to the highest earners,” but the Tax Policy Center analysis found most of the benefits of the tax cut go to the top 1 percent.

The White House and GOP congressional leaders released the framework of their tax plan on Sept. 27.

The plan would cut the corporate tax rate from 35 percent to 20 percent; abolish the alternative minimum tax; collapse the seven income tax brackets, ranging from 10 percent to 39.6 percent, to three (12 percent, 25 percent and 35 percent); increase the standard deduction but eliminate exemptions; eliminate most itemized deductions except for mortgage interest and charitable giving; increase the child tax credit; and abolish the estate tax.

There are many details missing from that framework, such as the income thresholds for the tax brackets, the amount of the child tax credit and more. The Tax Policy Center was able to do a “preliminary analysis,” using previous GOP and Trump administration proposals to fill in the blanks. “While the revenue, distributional, and economic effects are likely to
change as policy makers negotiate the details,” the TPC wrote in its report, “this analysis provides an estimate of the effects of the September 27 framework as we currently understand it.”

The Tax Policy Center is a nonpartisan think tank. Its tax policy experts rely on federal tax data and use the same tax modeling techniques practiced by the Treasury Department and nonpartisan congressional tax experts, such as those at the Congressional Budget Office and the Joint Committee on Taxation.

Pelosi made her claim twice on Oct. 5, on the floor of the House and in a press availability. She described the GOP tax cut as beneficial for the wealthy and “corporate America” but a tax hike of a half a trillion dollars for the “middle class.”

Pelosi, Oct. 5, floor speech: Where do the tax cuts go? $2.6 trillion to corporate America and guess what happens to the middle class? $470 billion in tax increases to the middle class, about a half a trillion dollars in increases to the middle class, $2.5 trillion in tax cuts to corporate America.

Pelosi, Oct. 5, press availability: The tax cuts in the bill — 80 percent of the tax cuts in the bill benefit the top 1 percent in our country. $2.6 trillion in tax cuts go to corporate America. Around $475 million — excuse me, $475 billion in tax increases go to Middle America. … So, again, it raises taxes on middle class, cuts the tax of the wealthiest, adds trillions to the deficit.

Trump, meanwhile, in an interview with Mike Huckabee on Trinity Broadcasting Network on Oct. 7, described the plan as having the opposite effect: a benefit for the middle class and not a tax cut for the wealthy.

Trump, Trinity Broadcasting Network interview, Oct. 7: I want to give the middle income people in this country — and this is not a tax [cut] for the rich. Now, everybody’s gonna benefit. But this is what we’re focused on more than anything and even more so, we’re actually adding things in as we speak, because you know, the plan’s being adjusted, et cetera. But this is for the middle class.

The president reiterated that in a speech in Harrisburg, Pennsylvania, on Oct. 11, saying: “By eliminating tax breaks and special interest loopholes that primarily benefit the wealthy, our framework ensures that the benefits of tax reform go to the middle class, not to the highest earners.”

Pelosi’s figures on business tax cuts and the benefits to the top 1 percent are correct, per TPC’s analysis. “The business income tax provisions — including those affecting corporations and pass-through businesses — would reduce revenues by $2.6 trillion over the first ten years,” the TPC report said. And it found that 80 percent of the benefit of tax cuts would go to the top 1 percent income-earners in 2027.

But what about the “middle class,” or as the president says, “middle income people”?

As the plan stands now, some would get a tax cut and some would see a tax increase in every income quintile or group.

GOP Tax Plan: Who Benefits?

First, let’s look at the big picture. Overall, the GOP tax framework would be a net tax cut for taxpayers in 2018 and 2027, according to the TPC analysis (see Tables 2 and 3).

“In 2018, all income groups would see their average taxes fall, but some taxpayers in each group would face tax increases. Those with the very highest incomes would receive the biggest tax cuts,” the TPC report says. “The tax cuts are smaller as a percentage of income in 2027, and taxpayers in the 80th to 95th income percentiles would, on average, experience a tax increase.”

TPC separates taxpayers into five groups, or quintiles, based on their income. Which income groups make up the “middle class”? There is no standard definition for the term, as we wrote back in 2008. We found then that the vast majority of Americans had said in polls that they consider themselves to be “middle class” or “upper-middle class” or “working class.”

That’s still true today. In a June 2017 Gallup survey, 44 percent said they were “middle class,” 28 percent chose “working class” and 18 percent said “upper-middle class.”

“Relatively few consider themselves to be lower class or upper class, at 8% and 2%, respectively,” Gallup said. “Overall, ‘middle class’ is the label Americans use more than any other to describe their social class, providing a useful catchphrase for politicians interested in appealing to the broadest swath of the public.”

Indeed, Pelosi is talking about a broad swath of the public when she claims that the GOP plan is a $470 billion tax hike on the “middle class.” She’s including all but the top 10 percent of taxpayers.

Deputy Communications Director Henry Connelly explained to us that the staff calculated that figure using tables 2 and 3 of the TPC report, which give percentages for the taxpayers that would see a tax cut or a tax increase, broken down by income groups, and TPC figures for the number of taxpayers in each group. Pelosi’s staff considered all taxpayers at the 90th percentile and below “middle class.”

“In 2018, that comes out to be around $26 billion a year, and by 2027, it’s around $73 billion,” Connelly said. “If you project those numbers across the 10 years you get almost half a trillion dollars taken in higher taxes on the middle class.”

Connelly told us that not going up to the 90th percentile “can exclude a lot of middle class families, especially when recognizing the burdens of child care costs or high cost areas.”

We’ll leave that for readers to judge.

According to the TPC, the 90th percentile is about $217,000 in “expanded cash income” or about $158,000 in adjusted gross income in 2018. Expanded cash income is pretax income that also includes employee and employer contributions to health insurance and tax-preferred retirement accounts, retirement account income, non-taxable Social Security or pension income, employer share of payroll taxes, and food stamps. Expanded cash income would be similar to the total compensation reports that some employers send annually to employees, showing not just wages but benefits paid on their behalf.

The TPC uses expanded cash income. Joseph Rosenberg, one of the authors of the TPC report, told us the income distribution tables would change if the analysis used adjusted gross income instead, but it probably wouldn’t have “a very significant effect” in terms of where taxpayers fall in the income percentiles.

We were able to duplicate Pelosi’s math for the year 2027, showing a tax increase of nearly $73 billion that year on taxpayers at the 90th percentile and below. But that same arithmetic shows a tax cut of even more — $102 billion — on the same group of taxpayers. Most taxpayers at the 90th percentile and below — about 65 percent of them — would get a tax cut in 2027, based on our calculations of TPC data.

In other words, while some in what Pelosi considers the “middle class” would see a tax increase, according to the TPC analysis of the GOP framework, more in that same group would see a tax cut.

That also clearly shows that, as the plan stands now, not “everybody’s gonna benefit,” as the president said.

Here’s how the Tax Policy Center explains the distributional effects: “In 2018, about 12 percent of taxpayers would face a tax increase of roughly $1,800 on average. More than a third of taxpayers making between about $150,000 and $300,000 would pay more, mainly because most itemized deductions would be repealed. … By 2027, taxes would rise for roughly one-quarter of taxpayers, including nearly 30 percent of those with incomes between about $50,000 and $150,000 and 60 percent of those making between about $150,000 and $300,000.”

The tax impact in 2027 would be worse for more taxpayers than in 2018 partly because, the TPC report explains, “the plan would replace personal exemptions, which are indexed for inflation, with additional credits for children and non-child dependents that are not indexed for inflation.”

Here’s the TPC chart for 2027, showing the percentage of taxpayers getting tax cuts or tax increases that year, the average amounts and the overall change by income percentile. (See the full report for the footnotes for the chart, including the percentile thresholds.)

Trump specifically mentioned “middle income people,” and later in that interview said, “middle income people, or the working people as I call them.” Middle-income would be the middle quintile — taxpayers with expanded cash income of about $50,000 to $90,000 a year. That group, too, would see mixed results.

Overall, the TPC said the Republican plan is “a small tax cut for middle-income households.” But again, some would see a tax increase.

“In 2018, the framework would cut taxes for moderate-income households by an average of $660, or 1.2 percent of their after-tax income,” Howard Gleckman, a senior fellow with TPC, wrote on the center’s website. “But not everyone would win. In 2018, about one in seven middle income households would pay an average of $1,000 more in taxes under this plan. By 2027, more than one of every four middle-income families would pay more in taxes.”

The president claimed in Harrisburg that “our framework ensures that the benefits of tax reform go to the middle class, not to the highest earners.” But that’s not what the framework ensures.

A majority of the top quintile (taxpayers earning $154,900 and above in 2027) would see their taxes increase, according to the TPC table above, which shows 53.4 percent of the top quintile with an average tax increase of $4,400. But 46.4 percent in that group see an average tax cut of $27,910.

For the highest earners — those in the top 1 percent and top 0.1 percent — nearly all would see lower taxes. Ninety percent of the top 1 percent — those earning about $900,000 and above in 2027 — would get a tax cut, averaging $234,050.

Share the Facts
FactCheck.org rating logo FactCheck.org Rating:
Spins the Facts
Says the GOP plan raises “middle class” taxes by $470 billion.
House floor
Thursday, October 5, 2017
Share the Facts
FactCheck.org rating logo FactCheck.org Rating:
Says “everybody’s gonna benefit” from his tax plan.
TV interview
Saturday, October 7, 2017