Donald Trump’s overhaul of the federal tax system would deliver a gigantic windfall to the wealthiest Americans, the left-leaning Citizens for Tax Justice (CTJ) claims.
Continue Reading Below
Payments would be trimmed by $250 for the poorest 20%, middle-income earners would save $2,500--and the top 1% of taxpayers would enjoy an average tax cut of $184,000, CTJ estimates. “By far the biggest beneficiaries would be the very wealthy,” CTJ says.
However, the open secret in Washington is that the upper brackets appear to get the biggest tax cuts because they are the ones actually paying federal income taxes, a fact CTJ studiously ignores. The top 20% of earners pay the lion share, 84%, of federal income tax revenue, says the Tax Policy Center, based on IRS tax return data. The Congressional Budget Office finds that number is nearly 70% (see below). Whereas 43% of Americans pay no federal income taxes.
So somehow, in America, those who pay more than eight out of every ten dollars collected in federal income taxes are criticized by those who don’t pay their “fair share” at all.
Also ignored in analyses such as CTJ’s report is work done by the nonpartisan Congressional Budget Office, which found the U.S. tax system to be highly progressive and redistributive, no matter the misplaced “income inequality” attacks which also consistently fail to acknowledge the trillions of dollars doled out in government benefits like Medicare, Social Security and jobless benefits, as well as company benefits like 401(k) and health insurance (see the CBO’s November 2014 report).
The CBO says that “government transfers reduce income inequality because the transfers received by lower-income households are larger relative to their market income than are the transfers received by higher-income households.” In fact, “the equalizing effects of government transfers were significantly larger than the equalizing effects of federal taxes from 1979 to 2011,” the CBO says.
“Federal taxes also reduce income inequality, because the taxes paid by higher-income households are larger relative to their before-tax income than are the taxes paid by lower-income households,” the CBO adds.
Meanwhile, AWOL in CTJ’s analysis is the real debate presidential candidates should be having. Left-leaning groups complain about who is paying their “fair share,” as if there is a national income pie to be sliced up. But government has eaten too much of its “fair share.” Government has gotten way too big and way too expensive. When the government gets its tax “pie” from people fighting for a better future, fighting to raise their incomes—which are remarkably successful incentives. As opposed to the Obama Administration constantly bad mouthing business.
Under Trump’s federal tax plan, seven individual federal tax rates would be collapsed into four: 0%, 10%, 20%, and a top 25% rate that would replace the present 39.6% all-in top tax rate, among other things. Individuals making less than $25,000 and married couples earning less than $50,000 would pay no federal income taxes.
Corporations would also see a tax rate cut under a Trump Administration, from 35% to 15%. That corporate tax rate is lower than the rate proposed by most other GOP candidates, with the exception of Rand Paul’s flat tax rate of 14.5%. Trump would also slap a 10% “repatriation” tax on the more than $2.1 trillion in profits multinationals keep offshore due to high U.S. taxation, the highest of 34 developed countries, according to the Organization for Economic Co-operation and Development (OECD). Getting that money back into the U.S. is considered the cheapest form of stimulus.
But as the “tax cuts for the rich” debate heats up over Trump’s tax plan, the CBO provides the gritty details that should be front and center in this debate.
Yes, the CBO estimates average inflation-adjusted after-tax income for the top 1% grew 200% between 1979 and 2011. That’s a big jump.
When you split up U.S. households into fifths based on their income, the CBO estimates that, once tax payments and government benefits are taken into account, the after-tax incomes of U.S. households in the three middle income ranges grew by a sizable 40% in real terms since 1979. For households in the bottom quintile, inflation-adjusted after-tax income grew a healthy 48%. The top twentieth quintile saw average incomes rise 67%.
With refreshing candor, the CBO found that, “between 1979 and 2011, government transfers reduced income inequality to a greater extent than federal taxes.” Specifically, it says that “in 2011, government benefits accounted for approximately two-thirds of the reduction in income inequality observed between market income and after-tax income.”
The CBO also disclosed that, as of 2011, a full 60% of U.S. households received on average more in the way of government benefits than what they paid into the federal government in the form of federal taxes.
Average government transfers in the middle quintile for a family making $49,800 came to $16,500. But they still end up with more, $59,000, in average income after they pay their federal taxes, the CBO says.
Same phenomena for the bottom and second-lowest quintile. The bottom averaged $15,500 in income, but they get $9,100 on average in government benefits, so after tax income amounts to $24,100, the CBO says.
The second to last quintile of U.S. households pulled in $29,600 in average income, but enjoyed after-tax income of $42,100 on average, once you factor in government benefits, the CBO says.
It’s in the fourth quintile, the second from the top quintile, where taxpayers start to fork over more in tax payments net of government benefits. These U.S. households on average earn $83,300 in income, but have $82,600 in after-tax income, once you net out government benefits and federal taxes, the CBO’s November 2014 report indicates.
And despite the “tax the rich” rhetoric, the CBO found that the portion of federal taxes paid by higher-income households increased more than the share of income earned by that group since the 1990s.
Specifically, the share of before-tax income received by households in the top quintile increased by 2.5 percentage points between 1995 and 2011.
But the share of federal taxes paid by those households was triple that share, growing 7.5 percentage points over that period, CBO estimates. The CBO found that, as of 2011, “households in the highest quintile received an estimated 51.9% of before-tax income,” but “paid 68.7% of federal taxes; households in the top 1% received 14.6% of before-tax income and paid 24% of federal taxes.”