House Republicans on Nov. 2 introduced a sweeping overhaul of the nation’s tax code, and almost immediately both parties distorted the facts about the plan to advance their partisan agendas:
- The tax plan isn’t the “biggest tax cut in our history,” despite the president repeating this claim over and over. He said it again in remarks at the White House on the day the bill was released.
- House Minority Leader Nancy Pelosi claimed the bill was a tax hike for “millions of middle-class families,” while the president said it’s a “middle-income tax reduction.” It’s really both. There will be winners and losers under the plan.
- Trump said cutting corporate taxes “would increase average household income by $4,000,” citing the White House Council of Economic Advisers. But don’t bank on it. That could happen in eight years if the economy grows at the robust annual rate of 3 percent to 5 percent, the CEA says. One economist cited by the CEA put the figure at $800.
- Trump said “wages are starting to rise” now “for the first time in a long time.” In fact, wages have been rising for a while. For all private workers, average weekly earnings (adjusted for inflation) rose 4 percent during President Barack Obama’s last four years in office.
- Rep. Kevin Brady, chair of the tax-writing committee, said the estate tax “isn’t paid by the super wealthy” but rather burdens “family-owned farms and businesses.” The tax, paid by fewer than 5,000 people in 2015, falls on estates worth more than $5.49 million or nearly $11 million for a couple.
- Sen. Chuck Schumer went too far when he said, “I wonder if you can find someone whose income is over $1 million a year … who’s going to pay more. They won’t.” The vast majority of millionaires will not pay more, but some will, according to an independent analysis of the earlier GOP tax plan.
- Democratic Rep. Richard Neal wrongly claimed that capping the mortgage interest deduction negated a tax cut for a hypothetical family of four earning $59,000, a GOP example. But that family would get the tax cut without a mortgage interest deduction.
- Trump said the corporate tax rate “is 60 percent higher than our average competition.” That’s true for the top statutory rate, but not for the effective tax rate or average tax rate, which is the amount of taxes as a share of income.
- Sen. Elizabeth Warren said corporations are now paying 10 percent of federal tax receipts, when they paid 30 percent decades ago. That shift is due to several factors, including the rise of payroll taxes and a shift from businesses paying corporate taxes to owners paying individual income taxes on pass-through business income.
The bill would cut the corporate tax rate from 35 percent to 20 percent; abolish the alternative minimum tax; abolish the estate tax; and collapse the seven income tax brackets, ranging from 10 percent to 39.6 percent, to four (12 percent, 25 percent, 35 percent and 39.6 percent).
It also would nearly double the standard deduction, but eliminate personal exemptions; increase the child tax credit by $600; and scrap most itemized deductions, except for charitable giving, state and local taxes (which would be capped at $10,000), and mortgage interest (which would be limited to up to $500,000 in loan debt for future mortgages).
On the day the House Republicans released the tax legislation, President Donald Trump gathered at the White House with House Republican leaders to tout the plan as a “very big” tax cut for the “middle income,” while Democrats met reporters at the Capitol to criticize it as a giveaway to the wealthy.
Both sides distorted the facts.
Not the Biggest Tax Cut
Trump wrongly said that the legislation will be “the biggest tax cut in our history.” It’s the eighth or fourth largest cut in history, depending on whether one measures it as a percentage of gross domestic product (the preferred measure) or in inflation-adjusted dollars.
The president has been making this claim for months, but cost estimates for the tax plan showed it wouldn’t the largest in history, as we wrote earlier this week.
Now that the legislation has been released, we know that the cost will be $1.49 trillion over 10 years, according to the nonpartisan Joint Committee on Taxation. Over the first four years, the average annual cost would be $185 billion. That’s about 0.9 percent or 1 percent of gross domestic product, depending on what that ends up being in 2018.
That’s nowhere close to President Ronald Reagan’s 1981 tax cut, which was 2.89 percent of GDP over a four-year average. That’s according to a 2013 Treasury Department analysis on the revenue effects of major tax legislation. Five more tax measures since 1940 had an impact larger than 1 percent of GDP, and the Committee for a Responsible Federal Budget includes a 1921 measure as also being larger than the GOP plan. That’s eighth place for Trump’s “biggest tax cut in our history.”
In inflation-adjusted dollars, the GOP plan is also less than the American Taxpayer Relief Act of 2012, which comes in at No. 1 with a $320.6 billion cost over a four-year average, and it’s less than tax reductions in 2010 ($210 billion) and 1981 ($208 billion).
Misleading on Middle Class
House Minority Leader Nancy Pelosi said the bill “raises taxes on millions of middle-class families,” while President Trump said that “this is a middle-income tax reduction.” Which is it? Both. Some families will pay more, but others will pay less.
An earlier analysis of the tax framework by the Tax Policy Center found most middle-income taxpayers would benefit under the plan. In fact, by 2027, most in every income quintile would see a tax cut, except for the top quintile — taxpayers earning $154,900 and above in 2027 — where a little more than half would see a tax increase.
“Millions” would see an increase in taxes, as Pelosi says, but millions more would see a tax reduction.
We’ll need a new analysis of the legislation, which includes details missing and changes from the original GOP framework, to provide more information on how the bill would affect taxpayers of various income levels. Tax Policy Center Senior Fellow Howard Gleckman wrote on Nov. 2 that the latest plan “would be more generous” to middle-income households than the framework. But “its effects on individual households would be very idiosyncratic. Some will pay more in tax than under current law while others will pay less. It will depend very much on their specific circumstances: Where you live, the size and composition of your household, and how you earn your living will matter. That, of course, is the way it is under the current tax code.”
Not everyone will come out as winners, nor will everyone lose, as politicians from both parties often claim or suggest.
Impact on Wages
Trump once again made the claim that cutting corporate taxes from 35 percent to 20 percent would greatly benefit the average household. “The Council of Economic Advisers estimates that the corporate tax reforms would increase average household income by $4,000,” he said.
As we have written before, don’t take that $4,000 to the bank.
The $4,000 estimate is cited in two reports by the White House Council of Economic Advisers. In the first report, the CEA didn’t say exactly how it arrived at the $4,000 per household estimate. It cited a number of economic research papers that “suggest” the proposed rate cut would increase average household income by anywhere from “very conservatively, $4,000 annually,” to $9,000.
But the author of one of the economic research papers cited in that report later said the White House misread his work. Mihir A. Desai, a professor of finance at Harvard, told the New York Times that the actual income gain would be $800.
In its second report, the CEA provided some justification for its $4,000 figure and, for the first time, how long it would take before households would see such a jump in wages and under what economic conditions. That report said the $4,000 pay raise would happen after eight years — if corporations increase capital investment and the nation’s real gross domestic product grows at a robust rate of between 3 percent and 5 percent annually. The annual real GDP hasn’t increased by 3 percent since 2005 and by 5 percent since 1984, according to the Bureau of Economic Analysis.
The CEA says the $4,000 increase is the result of its own “back-of-the-envelope” calculations, but it is consistent with “large empirical literature” of the effects of corporate rate reductions on worker wages.
It is true that some independent economic analysis suggests that cutting corporate income taxes can in theory have a powerful effect. For example, Alison Felix, economist with the Federal Reserve Bank of Kansas City, found in 2007 that countries with higher corporate income taxes had lower wages than other countries. Felix said her results predict that “the decrease in wages is more than four times the amount of the corporate tax revenue collected.”
But other economists disagree. Kimberly Clausing, a professor of economics at Reed College in Oregon, reviewed Felix’s findings and others that linked corporate taxes and wages. In a paper published in the National Tax Journal in March 2013, she stated that these studies contained “key limitations and are sensitive to idiosyncratic specification and data choices.” In her own research, she found “very little robust evidence linking corporate tax rates and wages.”
There’s also wide disagreement in Washington. While Treasury Secretary Steven Mnuchin has said that “most economists believe that over 70 percent of corporate taxes are paid for by the workers,” two nonpartisan government organizations — the Joint Committee on Taxation and the Congressional Budget Office — put that figure at 25 percent, with the rest of the burden born by investors.
The Economist magazine, reviewing the debate over the White House’s claim on wages, concluded that “the estimate is more than a little optimistic.” It presented data showing that “[t]here is no clear relationship between recent corporate-tax cuts and wage growth in rich countries,” and said that should the GOP corporate income tax rate cut happen, “Americans can expect a pay rise — just not a bumper one.”
Trump also took credit for rising wages, falsely claiming that they haven’t been rising for a long time.
“And something we’re seeing now is, for the first time in a long time, wages are starting to rise for people,” he said. “In some cases, they’ve been 18 to 21 years without a real salary increase or a wage increase.”
That’s false. Wages have been rising for quite some time now. For all private workers, average weekly earnings (adjusted for inflation) rose 4 percent during Obama’s last four years in office, from January 2013 to January 2017. And they rose another 1 percent during Trump’s first eight full months in office through September.
Those figures include managers and supervisors. Rank-and-file, nonsupervisory workers have seen their inflation-adjusted weekly earnings rise 4.7 percent during Obama’s last term, and another 1 percent under Trump.
Death Tax Affects the Wealthy
House Ways and Means Committee Chairman Kevin Brady, who introduced the tax bill, said that the estate tax, which he called the “death tax,” “isn’t paid by the super wealthy. It’s burdened by our family-owned farms and businesses, who worked a lifetime to build up a nest egg. That’s where the damage is done.” Brady made the claim on MSNBC on Nov. 3.
What qualifies as “super wealthy” is a matter of opinion, but the estate tax only falls on estates with assets of more than $5.49 million for an individual and nearly $11 million for a couple.
In 2015, 4,918 people had to pay an estate tax, according to IRS data. That’s about one out of every 500 deaths that year resulting in any estate tax liability.
As for “family-owned farms,” 639 estates that listed any farm assets had to pay the estate tax. And 122 of those had assets of $20 million or more, an amount some would consider to meet the definition of “super wealthy.”
A study published last year and updated in March by the Economic Research Service of the U.S. Department of Agriculture estimated that 161 estates that included farm assets in 2016 would owe any estate tax. The Tax Policy Center estimated a lower number, finding that only 50 farms and closely held businesses will pay any estate tax in 2017.
As we’ve explained before, one reason the numbers are so low — beyond the asset thresholds — is that there are exemptions for farmers and small businesses that can allow them to avoid any estate tax liability. Heirs can get exemptions for agreeing to farm the land for 10 more years, for example, or agreeing to conservation restrictions on the land. And with estate planning, one can reduce an estate’s value by giving portions to heirs as a gift over several years.
Update, Dec. 6: IRS data for 2016 tax returns is now available. A total of 5,219 people had to pay an estate tax in 2016. As for farms, 682 estates that listed any farm assets had to pay the estate tax, and 124 of those had assets of $20 million or more.
No Millionaires Paying More?
Sen. Chuck Schumer, the Democratic leader in the Senate, went too far when he said, “I wonder if you can find someone whose income is over $1 million a year … who’s going to pay more. They won’t.”
Analysts at the Tax Policy Center say the vast majority of the wealthiest taxpayers would get a tax cut, but they say at least some millionaires could pay more.
“I am guessing it is possible some with income over a million could see a tax hike if their income is all from earnings (very little business or investment income) and they live in a high tax state,” Eric Toder, co-director of the Tax Policy Center, told us. “But I would imagine the vast majority in that group would get a tax cut and the average tax cut would be very large.”
The TPC has not completed a detailed analysis of the GOP tax plan unveiled on Nov. 2, but an analysis of the previous “Unified Framework” plan put forward by Republicans found that a small minority of top earners would see a tax increase under that plan. That’s because, for some, the rate reductions would be more than offset by the elimination or reduction of a number of tax deductions and exclusions.
The analysis found that 9.8 percent of those in the top 1 percent of earners (people making over $912,100) and 3 percent of those in the top tenth of 1 percent (those making over $5 million) would see a tax increase in 2027. So somewhere between 3 percent and 9.8 percent of millionaires could see a tax increase. But the report found that the average tax cut for the top 1 percent would be more than $207,000 in 2027.
The new plan would retain the top tax rate of 39.6 percent, but would increase the threshold for that rate from $470,000 to $1 million. If anything, that would tend to slightly increase the number of millionaires who might face a tax hike.
Although the Tax Policy Center has yet to release a detailed analysis of the plan, the TPC’s William Gale wrote that, like the older plan, the latest version “showers benefits on the wealthiest taxpayers.”
Gale, Nov. 3: Several features would provide substantial tax cuts for the very rich. The corporate tax rate would be reduced to 20 percent from 35 percent. Most of this cut would accrue to high-income household because they hold the bulk of the stock. Tax rates on income from pass-through businesses – such as partnerships, S-corps, and sole proprietorships – would fall. This income also skews to the top — about 70 percent of partnership income accrues to the top 1 percent. The threshold for the top personal income tax bracket of 39.6 percent would rise from $470,000 to $1,000,000 (for joint filers), which is an additional tax cut of at least $23,000 for those earning $1 million or more. The alternative minimum tax would be repealed and the estate tax (which applies to only the wealthiest 5,000 decedents each year) would eventually disappear as well.
Mortgage Interest Deduction
Democratic Rep. Richard Neal of Massachusetts wrongly claimed that by reducing the mortgage interest deduction, the GOP tax plan would negate a tax cut of more than $1,100 that Republicans estimate a family of four making $59,000 a year would receive.
“[T]hey’re going to say on one hand that they’re giving $1,150 to the average family, and then simultaneously taking it away by capping deductions that they have for home ownership,” Neal said in a Nov. 2 press conference.
Actually, the $1,182 amount is the estimated average net gain after the family’s deductions are factored in.
An example provided by Republicans on the House Ways and Means Committee says that “as a result of lower tax rates, a significantly larger standard deduction, and an enhanced Child Tax Credit and new Family Credit,” a married couple with two children and an income of $59,000 a year would “pay over $1,182 less in taxes than last year, reducing their total tax bill from $1,582 to only $400.”
The tax plan proposes increasing the standard deduction for married, joint tax filers from $12,700 to $24,000, and it would eliminate or reduce several deductions currently available to those who itemize their taxes instead. The family in the GOP example takes the standard deduction, so they wouldn’t be able to take any mortgage interest deduction, whether under the GOP plan or current law.
For those who do itemize, the proposal allows current homeowners to continue deducting interest paid on mortgages up to $1 million, but caps that amount at $500,000 for any future mortgages. Only around 5 percent of mortgages obtained between 2013 to 2015 were more than $500,000, according to the National Low Income Housing Coalition.
However, only those households with total itemized deductions above the proposed standard deduction amounts would benefit from the mortgage interest deduction. And even under the GOP’s old “Unified Framework” plan — which didn’t propose any changes to the mortgage interest deduction — the Tax Policy Center estimated that only about 4 percent of all households would continue to find it more beneficial to itemize and claim the deduction. That’s down from about 21 percent who write off mortgage debt under current law, the TPC says.
As we’ve said, the tax bill would lower the top marginal corporate tax rate from 35 percent to 20 percent. In his Nov. 2 remarks at the White House, Trump said the tax cut would create jobs, reiterating his claim that “our corporate tax rate is 60 percent higher than our average competition.”
The U.S. has the highest top statutory corporate tax rate — 35 percent, and 39 percent when state taxes are included — among developed countries. That’s 60 percent higher than the average statutory rate among 35 countries, according to the Organisation for Economic Co-operation and Development, as Trump said. But, as we’ve explained before, the U.S. doesn’t have the highest tax rate by other measures, such as when tax credits are factored in.
The average effective corporate tax rate (what corporations actually pay) in 2008 was 27.1 percent, close to the GDP weighted average among other OECD countries, 27.7 percent, according to a 2014 Congressional Research Service report.
A Congressional Budget Office report in March found that the U.S. ranked third among G20 countries when using an “average corporate tax rate” measure, which is “the total amount of corporate taxes that a company pays as a share of its income.” And under an “effective marginal corporate tax rate,” defined as “a measure of a corporation’s tax burden on returns from a marginal investment,” the U.S. was fourth.
A 2016 Government Accountability Office report found that from 2006 to 2012 “at least two-thirds of all active corporations had no federal income tax liability.”
The difference between the U.S. statutory rate and the OECD average is 32 percent when weighted to reflect the relative size of the countries’ economies, according to a Congressional Research Service analysis in 2010.
Corporate Tax Receipts
Democratic Sen. Elizabeth Warren criticized the corporate tax cut in the GOP plan, but offered statistics that don’t tell the whole story on how much corporations contribute to federal tax revenues. (See the 2:20 mark of the video.)
Warren, Bloomberg TV, Nov. 2: Let’s understand today in America those big corporations are paying about 10 percent of the total bill of what it takes to run the government. Do you know how much they paid just 30, 40, 50 years ago? They paid 30 percent of the entire ticket. So who’s picking up the difference? The answer is middle class families.
Warren’s timeline is a bit off. Corporate income taxes haven’t been 30 percent of federal receipts since the mid-1950s. That’s more than “just 30, 40, 50 years ago.” Sen. Bernie Sanders used these statistics during the 2016 presidential campaign, saying that corporate income tax receipts had dropped from more than 30 percent of federal revenue in the 1950s to just 11 percent in 2015. The suggestion is that favorable tax policies have led corporations to pay less. But there are several factors behind these numbers.
Payroll taxes have increased greatly since the 1950s, in part due to the creation of Medicare in 1965, and there has been a shift in recent decades from businesses paying corporate taxes to entities set up to pay pass-through business taxes through owners’ individual income taxes. For more on the factors behind the decline in the percentage of corporate tax receipts, see our Feb. 24, 2016, story, “Sanders’ Corporate Tax Comparison.”
The GOP plan also cuts the top tax rate for some pass-through business earnings. Instead of a top individual income tax rate of 39.6 percent, the top pass-through rate would be 25 percent for 30 percent of net business income.
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