Dec 4, 2017 #1
Why Tax Cuts Are Bad For The Middle Class
Taxes are considered to be one of the certainties of life. The House Republicans have proposed a tax reform plan covering Federal income taxes on businesses and individuals as well as other levies. The reform does not affect social security contributions, and state/local taxes (Feldstein 1). The strategy involves the following: increasing the uniformity of taxation; reducing rates; and changing exemptions and deductions. The plan is expected to change the Personal Income Tax (PIT) structure dramatically. It proposes the introduction of two significant changes to the Federal corporate taxation. The first change is reducing the standard corporate tax rate to 15% from 30%. Secondly, it proposes to replace corporate income tax by cash-flow consumption tax (Bernardi 2-3). The proposed tax reform has been heavily criticized due to distributional effects. The paper focuses on addressing the impact of tax cuts on the middle class.
According to Haughton et al. (2016), there are two main distributional effects associated with the tax reforms. The first effect is reducing the revenues of federal tax by approximately $8.4 trillion over the next decade. Secondly, 70% tax reductions would only be enjoyed by individuals within the top 10th of the U.S income distribution. The proposed change is therefore substantially regressive since it does not favor the middle and the low-income earners (Haughton et al. 3). The Republican tax reform focuses on abolishing the estate tax, reducing the rates of personal income tax, and cutting corporate income tax rates. The proposed changes do not augur well with the middle-income earners in the United States.
Cole (2016) posits that pass-through taxation has emerged to be one of the main policy questions in the proposed tax plan. Pass-through businesses are taxed through the income tax code of individual owners and not via the corporate code. The current policy in the United States requires businesses to distribute earnings to their owners annually. The earnings appear on tax returns of their owners. On the contrary, earnings are retained by C corporations. They are not distributed to a particular shareholder (Cole 4). As a result, shareholders are allowed to defer the liability of personal income tax on wealth gains from corporations. There are two layers of tax that are paid by C corporations. They include personal income taxes, and entity level tax. Taxes on entity targets retained profits while income taxes are on the disbursed profits of the shareholders. The aim of the proposed tax reforms is lowering business tax rate and eliminating the corporate alternative minimum tax (Feldstein 3).
The implementation of the tax reforms would largely be seen as a bad move by the middle and low-class citizens. It would indicate that the ruling class is out of touch with the wants and needs of people they represent. The bill does not seek to reduce the widening gap between the rich and the poor. Instead, it is more likely to widen the gap. A strong middle class is vital to sustain economic growth. The tax reform promises not to touch the billionaire tax shelters while doing away with most deductions of the middle class. The strategy is likely to deepen the wedge and increase disparity. The proposed changes would trigger higher inflation thereby contributing to the higher cost of everything. The benefits of the tax cut reforms would largely go to the upper-income taxpayers. Households that earn $1 million or more would get one-third of the plan's benefits (Avi-Yonah, Reuven and Gianluca 3). Abolishing the estate tax would also benefit the upper class. Taxes would go up for most middle-class families, particularly those living in New York and California which are considered to be high-tax states.
According to the proposed bill, tax deductions would be eliminated on student loans and high medical expense. The plan recommends permanent cuts on corporate tax but provides for expiration of individuals' tax cuts after 2025. As a result, households would be faced with tax hike unless there is the intervention of the Congress. Trump administration seems to be out of touch with reality concerning the effect of the bill on middle and low-class Americans. Although it is expected that the tax cut would make company invest in creating more jobs, they may choose to use the funds in paying a debt, looking for possible mergers, and purchase their stock. According to mainstream economists, the plan would result in a federal deficit that is valued at $1.5 trillion over the next decade (Cole 9-11).
The GDP of the United States will be raised by almost 10% if the plan is affected. The reforms would only confer modest relief to the poorest 40% of the population. The top 10% in terms of income distribution will realize relative and absolute gains from the reforms (Bernardi 6). The middle class would get a moderate benefit. It would have an expensive effect on the overall economy thereby making the situation much worse for the middle and low-class citizens. The tradeoffs of the plan seem to be increasing income and expanding economic activity. Tax reduction on the capital is expected to expand economic activities in the United States. Taxpayers with high-income will gain the most since capital concentrates on individuals within the higher income brackets. Reduction in tax revenue due to tax cuts may ultimately affect the financing of essential services like healthcare (Feldstein 4-5).
The Republican tax reform plans on cutting the rate of corporate income tax from a maximum of 35% to 15%. The cut applies to C corporations that include Fortune 500 companies such as Exxon and Bank of America. The U.S. is considered to have the highest corporate income tax rate in the world. The move is considered by economists to be crucial in prompting companies to increase investment and hire more workers thereby spurring economic growth. The bill also requires taxpayers who have their business owners like real estate mogul, freelances, and lawyers to pay the 15% rate. Although the strategy is considered crucial in leveling the ground for small business owners, an instinctive appeal may be created when big corporations and small businesses pay the same 15% rate (Kim 3-4).The plan may not necessarily create parity since owners of corporate pay a second tax on their share profits after corporations have paid corporate profit tax.
The economic impact of the tax cut is likely to be weak since it has generally been known that the plan does not contribute to economic growth by spurring investment and hiring. Although the lower rate of taxation is likely to boost the annual GDP of the United States by 0.13% over the next ten years, it would also cause the deficit to increase by 1.3 trillion. The huge deficit would occur even after putting into consideration the higher tax receipts resulting from the extra growth (Feldstein 4-5).
According to President Trump cutting taxes for businesses is crucial in making the life of the middle class better. Lowering business taxation means that American workers will have higher wages. It can also increase the number of products made in U.S. The critics of the tax cuts reform argue that the government wants to con average Americans with the aim of enriching corporations and the wealthy. Trump administration is trying to sell the benefits of the bill to the ordinary Americans. According to the proponents of the tax cuts reforms, reducing the rates of corporate tax and reforming business taxes is vital in boosting investment in America thereby creating more jobs and boosting wages (Shay 2-3).It is essential to note that the benefits may not be immediate or great as promised by the Trump administration. The fact that workers tend to bear a huge burden of corporate taxes cannot be disputed. As the amount of taxes paid by companies' increases, they create fewer jobs and give lower wages.
It is essential to establish the tax burden borne by workers. Joint Committee on Taxation has estimated that workers bear 25% of the tax burden in the United States. According to the 2015 Tax Analysis by the Treasury Department, the figure is much lower at 19%. The effect of the corporate tax on workers may be determined by time and magnitude. It takes years for significant benefits to be realized. The expected benefits may not be realized at all if a temporary tax cut is passed by legislators for a few years. Temporary tax cuts cannot sustain economic growth and development (Avi-Yonah, Reuven and Gianluca 6). The reforms may not confer a competitive advantage to the country on the global state if the new rate is not significantly lower as compared to those of other nations. The rate should be relatively lower as compared to other countries to have a potential of boosting the economy of the United States.
There are various reasons that have been advanced to support the argument that corporate tax cut will not be helpful and may end up hurting the middle class. Corporate profits in the United States are very high. Corporation sits on nearly $2 trillion both abroad and in U.S. Creation of jobs and increased of wages have not significantly gone up despite these developments (Bernardi 9). The current U.S. administration believes that difference would be made through a big tax cut. The proponents of the reform postulate that distributing tax cuts to shareholders during the early years of implementation can make a big difference. The move can be harmful since government borrowing will be used in offsetting the costs of tax cuts thereby increasing deficits. As a result, essential programs targeting middle- and low-income families may be subjected to deeper spending cuts due to increased debt (Kim 7).
The biggest question facing the tax reform bill is how to pay for the cuts. One of the possible solutions that have been proposed is taxing the retirement savings of Americans up front. The 401(k) contributions of employees are not usually taxed. The withdrawals of the fund are usually taxed as regular income. Taxing the contributions would mean that gains and withdrawals are tax-free. The strategy is crucial in raising revenue in the short-term by front-loading taxes paid on the long-term (Shay 4).The downside of the strategy is that money would be lost over time due to reduced revenue resulting from employees making tax-free withdrawals. The timing shift is considered to be a fiscal gimmick because it focuses on producing savings in the short term through long-term deferment of costs.
According to experts, the proposed cut is likely to generate unintended consequences. It may promote tax avoidance and worsen inequality. Workers may force themselves to qualify for the attractive lower rates. The implementation of a similar strategy in Kansas (2012) resulted in a ballooning deficit and an upsurge of small business owners. The State is still cleaning the mess generated by the tax move (Cole 12).
The latest iteration of Trump's tax plan has been unveiled with the aim of reinvigorating American business. One of the key aspects of the proposal is lowering tax rate for particular business owners. Although the move may give a huge handout to some wealthy individuals, it is likely to cause a major jolt of the economy. The Republican tax reform bill does not define how individuals will get tax breaks. The bill has been criticized as a bad deal for America. It is widely perceived to be geared towards helping corporations and the wealthy at the expense of the middle class. Democrats are determined to ensure that the bill does not go through since it holds no good for Americans. Despite the fact that the GOP bill proposes substantial support for tax reforms, it has not been embraced by the public (Feldstein 8). A research survey indicates that the bill is approved by 25% of Americans while 61% argue that the tax overhaul will mainly benefit the wealthy. Another survey that was recently released by Harvard-Harris Poll indicates that the Republican tax bill is opposed by 54% of respondents (Cole 11-14). The bill is not bipartisan, and neither is it focused on helping American workers.
The tax reduction reform bill is considered to sacrifice the benefits of American workers to those of big corporations. Its focus is to give short-term tax reductions while increasing the national debt. The bill is not necessary for strengthening the American economy, putting more money in people's pocket or giving the country a competitive edge on the global stage. The main focus of the plan is removing state deduction and local taxes. It can result in much higher taxes for individuals living in high tax areas. The double standard reduction does not offset the higher taxes. Approximately half of Americans will have their tax doubled by 2027 if the bill goes through (Bernardi 12). The reform set to establish to lower the rate of corporate tax permanently. On the contrary, it will not change the lives of Americans permanently. The Senate bill is only beneficial to corporations and not other businesses. American voters are aware of the fact that reducing corporate taxes would be more beneficial to companies than the people (Kim 10).
Healthcare is one of the key sectors that GPO legislation will impact. The bill provides for the elimination of the individual mandate. As a result, more than 10 million Americans at a risk of losing their health care. The reforms will ensure that Americans are not able to afford health care thereby increasing morbidity and mortality. A sick and dying nation cannot work resulting in low productivity and slower economic growth. The American economy has been on a positive trend since President Trump took over the office. The economic progress could be halted by the execution of the new law. Americans do not want their taxes increased, and the Democrats are fighting the bill with the aim of ensuring that it fails. Progressive groups are also against the plan since it would be harmful to the middle class. Passing of the bill will leave 10 million Americans without health insurance (Shay 5-7).
The proposed Republican tax reforms aim for a large tax cut targeting individuals and corporate income. The plan is considered crucial in reducing the cost of capital as well as the rate of marginal tax on labor. Changing the incentives to work and invest would cause the economy of the United States to increase in the long-run. It is expected to create more jobs and boost wages. Tax reduction is expected to reduce the revenue of the federal government. It has been estimated that the reduction would be in the margin of $4.4 trillion and $5.9 trillion based on the assumptions of the policy and rates of business tax. Although it is expected that the after-tax income would generally increase across all the income groups, the middle-income taxpayers would not realize significant benefits. The distribution effect analysis indicates the rich would benefit at the expense of the rich. The tax reform bill seems to be more of a political survival strategy rather than an economic policy. Individual income tax will increase after 2025 if the bill is not repealed by the Congress. Tax cuts would cause inflation in the long run and reduced spending on programs that cater for the welfare of middle and low-income earners. The government can be forced to cut spending on key programs due to the reduction in federal revenue.