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Income Inequality Increases Under the Trump-GOP Tax Cut?

My Esoteric spent 20+ years as a DoD Cost and Economic Analyst as well as a program manager of the Air Force Total Cost of Ownership MIS.

The IRS building in Washington, DC.

The IRS building in Washington, DC.

The Rich Win Big and Corporations Win Bigger

The following is based on research by Tax Policy Center and the bipartisan congressional Joint Committee on Taxation, as well as information from H & R Block.

Individuals

Table 1 offers an idea of what the public has thought of the Trump-GOP tax plan - not much apparently. Shown, over time, is the Approval rating, which has never been above 50% and the "spread" between Approval and Disapproval. Taken as a whole, the only demographic who approves of the plan is the Trump base, with occasional exceptions. Most important is what appears to be happening now as "tax day" approaches and people start finding out what the real impact of the law is. They are not impressed, it would seem.

TABLE 1

GOP TAX PLAN POPULARITY
Source: Averages from Real Clear Politics poll

MONTH/YEARAPPROVALSPREAD (Approval less Disapproval)

Sep 2017

28.0

-16.0

Oct 2017

29.7

-13.2

Nov 2017

34.8

-15.2

Dec 2017

29.7

-21.8

Jan 2018

42.7

-4.9

Feb 2018

47.1

+2.0

Mar 2018

39.1

-4.6

Apr 2018

37.4

-5.2

May 2018

41.1

-1.2

Jun 2018

37.5

-3.5

Jul 2018

37.8

-2.2

Aug 2018

38.2

-2.2

Sep 2018

36.0

+3.5

Oct 2018

45.0

+8.0

Nov 2018

38.0

-1.0

Dec 2018

40.0

+1.0

Jan 2019

35.6

-1.0

Feb 2019

39.5

-2.7

Mar 2019

37.7

-5.9

Apr 2019 (tax month)

37.0

-9.0

It is well known that by far the biggest beneficiaries of the Republican tax act are the wealthy (except for some of those who live in Blue states) and corporations. It goes without saying that those who pay most in taxes will receive the largest tax breaks in terms of dollars returned. While on the face of it, that seems like a fair outcome - you pay more in taxes, you get larger refunds. That is true, but only to a point. To be fair, the percentage decrease should be roughly equal among all income groups.

For example, from Table 2,

  • You see returns with adjusted gross incomes (AGI) of between $500,000 and $1,000,000 received an average decrease in taxes of $20,878. Assume the average AGI for this group is $750,000 for arguments sake.
  • Now consider the AGI group between $10,000 and $20,000, with an average AGI of $15,000.
  • Notice that the higher income group is 50 times that of the lower group. So to be fair, the smaller AGI group should receive 1/50th of what the higher group received - agreed?
  • Well, what is 1/50th of $20,878? Would you believe, if I did my math right, $418. Now compare this with what the $10,000 - $20,000 group actually did receive in lower taxes - $87. This is 79% smaller than it should be.
  • And this, folks, is how Income Inequality is created!!

Save for those earning above $1,000,000, this dynamic works among all income groups. Bottom-line, the Trump-GOP tax cut as gone a long way to drive up Income Inequality.

What is different about those with AGIs over 1,000,000? It is other provisions regarding caps on interest and mortgages as well as other similar things. See the 13% increase in taxes from Table 3 for the very wealthy? That is the result of these limitations which impact the rich who live in Blue states. Very few super rich who live in Red states were similarly impacted - I don't think that was by accident.

Who Benefited Most

TABLE 2
Based off of DISTRIBUTIONAL EFFECTS OF PUBLIC LAW 115-97 Mar 2019 Report

ADJUSTED GROSS INCOMEAVERAGE DECREASE IN TAXES ($)NUMBER OF RETURNS (000)% of TOTAL RETURNSACCUMULATED %

$0 - $10,000

20.56

19,260

10.9

10.9

$10,000 - $20,000

87.13

20,566

11.6

22.5

$20,000 - $30,000

138.63

21,510

12.2

34.7

$30,000 - $40,000

338.27

16,011

9.0

43.7

$40,000 - $50,000

523.95

12,841

7.3

51.0

$50,000 - $75,000

841.31

27,383

15.5

66.5

$75,000 - $100,000

1,258.05

17,835

10.1

76.6

$100,000 - $200,000

2,294.71

30,667

17.3

93.9

$200,000 - $500,000

7,125.57

9,152

5.2

99.1

$500,000 - $1,000,000

20,877.94

1,147

0.6

99.7

$1,000,000 +

64,428.32

572

0.3

100

 

 

 

 

 


Table 3 brings the impact on individuals into much clearer focus, especially in seeing how all but the very wealthy were left in the dust by the Trump-GOP tax plan.

Consider - from Table 2, you see that 51% of the returns earned $50,000 or less (this represents the lower to middle class this tax bill was supposedly targeted at) in AGI. Then from Table 3, what do we find? By using my calibrated eyeball from having done things like this for 20 years,

  • 50% of this cohort saw effectively no change in their tax burden at all (that means 25% of the total)
  • Roughly 20% saw Decreases in their taxes by greater than $500, which is not bad at all.
  • But, roughly 30% only saw a $100 - $500 decrease.
  • On the other hand, about 1.25% saw their taxes actually go up between $100 and $500 while 4%, roughly, saw tax increases of more than $500! I didn't think that was supposed to happen.

Finally, as mentioned before, the "Blue State penalty" caused taxes to rise for a full 13.8% of those returns whose AGIs exceeded $1,000,000.

Clearly, the Trump-GOP tax plan was designed to help only certain Americans and not everybody like promised.

% of Returns With Differing Increases and Decreases in Taxes

TABLE 3

INCOME% of Rtns Tax Decrease > $500% of Rtns Tax Decrease > $100 - $500Tax Change Less Than $100% of Rtns Tax Increase $100 - $500% of Rtns Tax Increase > $500

Less Than $10,000

0.7

3.5

95.6

0.1

0.1

$10,000 - $20,000

5.6

38.9

52.4

0.4

2.7

$20,000 - $30,000

17.2

30.5

47.1

1.0

4.1

$30,000 - $40,000

30.1

32.0

32.4

1.9

3.7

$40,000 - $50,000

51.2

21.7

20.2

2.8

4.2

$50,000 - $75,000

67.7

14.7

10.2

2.8

4.6

$75,000 - $100,000

77.8

10.4

4.1

3.0

4.8

$100,000 - $200,000

87.0

4.1

1.7

2.0

5.1

$200,000 - $500,000

93.0

1.8

0.6

0.9

3.7

$500,000 - $1,000,000

93.5

0.3

0.1

0.3

5.9

$1,000,000 +

85.3

0.3

0.2

0.3

13.8

Corporations

This is who the tax bill was really designed to help - and it did - big time. Specifically, it was the stockholders and senior executives who benefited most. Who didn't, on average, were the workers, consumers, and Treasury. While there was great hype at the inception of the law by a few companies giving bonuses and raises to the rank and file (who Trump promised would receive 70% of the windfall), by-and-large, that didn't happen.

Nor did the reinvestment the GOP promised. Granted, some reinvestment did happen, but mostly the windfall profits were plowed back into higher salaries for the senior executives and "stock buybacks" which push up the value of the stocks of these corporations.

  • Instead of 70% going to the workers, they got maybe 13%.
  • The promoters of the GOP tax plan said corporations wouldn't use the windfall to buy back stock. Instead, 43% was used for this purpose (or to pay dividends).
  • Only about 15% seems to be being used for reinvestments

Losers - Blue State Filers

That H&R Block preliminary data shows that every one of the states where refunds are shrinking is blue. Americans rely on the refunds as a sort of forced savings plan. Particularly hurt, as already mentioned, were people who itemized in with high state and local taxes such as New Jersey, California, and Massachusetts.

Winners - People Whose Income Doesn't Come From Working

This would be people whose principal income sources are dividends, capital gains, or beneficiaries of the "carried interest" exemption (hedge fund managers). It also includes heirs of the very wealthy. None of these people actually "earned" their income yet they got huge tax breaks from the Trump-GOP tax plan.

Losers - Washington D.C. Tax Filers

The capital is seeing the largest average refund drop, at 6.1%. It is also seeing the smallest decrease in average tax liability, 18% -- which is indeed a cut, but the smallest, on average, in the country.

Winners - Red State Tax Filers Who Depend on Refunds

According to preliminary data from H&R Block, it is mostly red states, those that voted for Trump in 2016, who are getting the largest bump in tax refunds.

Losers - The US Treasury, Deficits, and the National Debt

Because of all these tax cuts -- and especially the corporate cuts -- budget deficits are expected to skyrocket past $1 trillion per year starting in 2022 and stay there. With the national debt over $22 trillion, that means the US will ultimately have to make some hard choices.

This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.

© 2019 Scott Belford