TAX REFORM FOR THE WEALTHY

After the failure of the Republican health care reform proposal, the Trump administration and Congressional Republicans may turn their attention to tax reform. As with their health care reform, WATCH OUT!

House Speaker Paul Ryan, one of the architects of the health care reform proposal, has a tax reform plan. However, despite unprecedented levels of income and wealth inequality in the US, it would exacerbate inequality, not reduce it.

House Speaker Ryan’s tax plan would give huge tax cuts to high income households and very modest ones to everyone other than the 5% richest households. The other 95% of households – those with incomes of less than roughly $300,000 – would receive an average tax cut of less than $400 per year. Households with incomes of less than $25,000 would get an average tax cut of only $50 per year. [1]

The richest 1% of households – those with incomes of more than $700,000 – would receive an average tax cut of about $200,000 per year. And the richest 0.1% of households – those with incomes of more than $3,700,000 – would receive an average tax cut of about $1,200,000 per year or $12 million over 10 years! Clearly, this would make income inequality worse, not better!

Speaker Ryan’s plan would cut individual income taxes by approximately $3 trillion over 10 years, with 76% of the cuts going to the richest 1% and 47% of the cuts going to the richest 0.1%. Over time the benefits become even more skewed, with the top 1% getting 99.6% of the benefits by 2025.

The highest tax rate on unearned interest income would be cut from 43.4% to 16.5%, while the top rate on capital gains and dividends would be cut from 23.8% to 16.5%. This means that an individual, working hard and earning a modest $50,000, would be paying income tax at a rate of 25%, while a wealthy individual with $50,000 in unearned income from investments would be paying a tax rate of 16.5%.

The top individual tax rate on earned income (i.e., income from working) would be cut from 39.6% to 33% and the Alternative Minimum Tax, whose purpose is to ensure that high income households pay at least some taxes, would be eliminated. In addition to cutting income taxes, Ryan’s plan would eliminate the estate and gift taxes, thereby cutting taxes on the transfer of wealth and facilitating the perpetuation of the tremendous wealth inequality in the US. [2]

If instead of Ryan’s plan, the $3 trillion 10-year tax cut were simply split evenly across all households, every household – rich, middle class, or poor – would get $1,810 per year. Given the tremendous inequality of income and the economic insecurity of the middle and working class, I don’t think it’s fair to give everyone the same amount of money. Some need more income much more than others. But it’s much fairer than what Ryan and the Republicans have proposed to-date!

The rationale that we’re likely to hear for these tax cuts is that they will stimulate economic growth. However, real-life experience has shown that this is not true. Presidents Reagan and George W. Bush cut taxes for the rich and the economy did NOT boom. President Clinton, on the other hand, increased taxes on the rich and economic growth accelerated. So, don’t believe the false argument that tax cuts for the rich will improve the economy. The only rationale that I can think of for these tax cuts that makes any sense is that our policy makers want to give big tax cuts to their big campaign donors.

[1]      Blair, H., 1/13/17, “Republicans’ opening bid for tax reform is egregiously tilted to the rich,” Economic Policy Institute (http://www.epi.org/publication/republicans-opening-bid-for-tax-reform-is-egregiously-tilted-to-the-rich/)

[2]      Nunns, J., Burman, L., Page, B., Rohaly, J., & Rosenberg, J., 9/16/16, “An analysis of the House GOP tax plan,” Tax Policy Center of the Urban  Institute and the Brookings Institution (http://www.taxpolicycenter.org/publications/analysis-house-gop-tax-plan/full)

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