Saturday, Oct. 21, 2017 | 2 a.m.
The tax reform framework released three weeks ago by the White House and Republican congressional leadership has lofty goals: Simplify the tax code; provide relief for middle-class families; cut taxes for businesses; end many narrowly focused special tax benefits; and keep the reformed tax code “at least as progressive” as the existing one.
Many of the policies proposed in the framework remain ambiguous. Yet it is those policies, in particular the details of the child tax credit expansion, that will determine whether most American families win or lose.
Policies Tend to Benefit the Rich
We’re able to give an estimate of how each policy in the GOP framework could affect families at different income levels on average in 2026, using assumptions similar to those in a recent analysis by the Tax Policy Center. Under these assumptions, the plan as it now stands has a modest benefit on average over all, and a substantial benefit to the top 1 percent.
By everyone’s admission, the plan is a work in progress and could change (possibly including new ideas). But it is specific about the levels of the new standard deduction; the repeal of personal exemptions and the alternative minimum tax; the cut to the corporate income tax rate; and several other policies.
The Policies That Are a Key
Critics of the Tax Policy Center analysis — like Kevin Hassett, chairman of the White House Council of Economic Advisers — rightly say that since Congress is still working out the details of tax reform, we should view any evaluation of the framework as preliminary and tentative. (We should likewise be skeptical of any assertions of the plan’s economic benefits at this point.)
Three of the more ambiguous policies have the most potential to change the distribution of benefits: a possible fourth bracket on high-income filers; adjusting the thresholds for the new income tax brackets; and expanding the child tax credit.
A Fourth Bracket?
The GOP framework sets individual income tax brackets at 12 percent, 25 percent and 35 percent, but leaves open the possibility of a fourth rate higher than 35 percent. This wouldn’t directly benefit middle-class families by itself. But it would taper the benefit to the top 1 percent and could be used to lower the deficit impact of tax reform legislation overall.
Consider as an example a 45 percent top rate on income above $1 million ($1.4 million if married). This rate is 10 percentage points higher than the top marginal rate proposed in the framework, and 5.4 percentage points higher than the current top marginal rate. This idea would lower the benefit to the top 1 percent by about a fifth, and raise about $500 billion over 10 years. It’s a meaningful impact, but it’s not enough on its own to meet the framework’s distributional goals, even before accounting for how the rich might reclassify income in the wake of such a higher rate.
Expanding the Lowest Bracket
Alternatively, the new individual income tax brackets could be adjusted so that more income is subject to the lowest 12 percent rate instead of the 25 percent rate. But in fact, under the Tax Policy Center’s assumption that the current 10 percent and 15 percent brackets are converted to the 12 percent bracket, much of the middle class already gets all the benefit it can from the new 12 percent bracket. If, for example, we expand the 12 percent bracket to also include income currently subject to the 25 percent rate, virtually all of the added benefit flows to families above the 70th percentile (about $87,000 for a family of two in 2017).
So while expanding the 12 percent bracket could provide relief for families in the top quarter, including some who think of themselves as middle class, it isn’t an effective way of reaching working families in the bottom three quarters.
Gain in Expanding Child Tax Credit
Of the policies explicitly mentioned in the GOP framework, expanding the child tax credit holds the most potential for reaching lower-income families. But simply expanding the current credit delivers only modest benefits. That’s because the regular child tax credit is nonrefundable, which means that it’s valuable only to families with federal income tax liability (the additional child tax credit does allow some families with three or more children to claim part of the regular child tax credit as a refund, but the benefit is capped and often uneven).
This is why large increases to the current child tax credit do not significantly change the balance of benefits under the framework. The Tax Policy Center assumes that the regular credit is expanded by $500 to a maximum of $1,500 per child. But an even more generous expansion of the regular credit — say, tripling it to $3,000 per child — would help lower- and middle-income filers only somewhat more than under the Tax Policy Center’s assumptions.
Gains From Reforming the Credit
There are other ways to make the child tax credit more generous to these families. If the credit were fully refundable, or applicable against both income and payroll taxes — which virtually every working person pays regardless of income — more families would benefit.
There have been several plans over the years to do exactly that with the child tax credit, from both Republicans and Democrats. We modeled an idea based on a 2015 proposal from Sens. Marco Rubio and Mike Lee, though it may not reflect their latest thinking. The Rubio-Lee proposal called for an additional $2,500 per child tax credit that would not be refundable but could be used to offset both income andpayroll tax liability. If Congress adopted this approach in tax reform legislation, the benefit to lower- and middle-income families would be drastically larger than from other policies in the framework.
This approach has trade-offs, of course; most notably, it would raise the deficit by $1.4 trillion over 10 years, on top of the already $2.5 trillion cost of the framework under the Tax Policy Center’s assumptions. So simply tacking a Rubio-Lee-style approach onto the existing framework might prove to be a deal breaker for too many in Congress without other changes.
Aggressive Assumptions
The Tax Policy Center, as well as nonpartisan analysts at the Congressional Budget Office and the Treasury Department, assume that the vast majority (around 80 percent) of the benefits of corporate tax cuts are in the form of higher capital income, such as dividends and returns on investment. They see the benefit to wages and salaries as being modest by contrast. The White House argues that wages will grow much more than these agencies assume.
But even if capital income only saw, say, 50 percent of the benefit of cutting corporate taxes, the distribution wouldn’t look radically different. Since both capital and labor income skew toward the top 1 percent, changing these assumptions can affect the estimate of the absolute benefit for any given family but can only go so far in shifting their share of the benefits in a distributional analysis.
In the end, if Congress wants to prioritize tax relief for lower-income and middle-income Americans, the framework gives it some options, not only in how it fills in the details on the more ambiguous policies, but also in whether it chooses to scale back any of the less ambiguous ones.
