Trump's 'Massive' Middle-Class Tax Cuts Are Tiny Compared To Those Promised To The Rich

During last night's speech to Congress, President Trump said very little about his much-anticipated plan for tax reform. One thing he did say was this:

We will provide massive tax relief for the middle class.

This promise was surely met by cheers from coast to coast, as it should have been. But it raises an interesting question: how does a middle-class taxpayer measure whether the President delivers on his promise? Do you simply view the tax cuts for the middle class in isolation? Or must the cuts be viewed in their larger context, relative to those bestowed upon the richest Americans?

Based on what we know about the President's tax proposals to date, how you choose to answer that question will likely dictate your satisfaction with any forthcoming tax cuts and your determination as to whether President Trump kept his word. If you focus only on the impact on you, a hard-working member of the middle class, you may well be happy enough with the extra $1,500 in your pocket each year to call the plan a success.

If you succumb to looking at those around you, however, you may take note of the fact that the wealthiest 20% of taxpayers will enjoy an average annual tax cut of $16,660 -- with the top 1% walking away with an extra $214,000! -- and find yourself feeling significantly less satisfied.

I'm not here to tell you the right way to measure a tax cut; rather, I just think we should all understand the President's tax plan, as currently constituted, and the distribution of its promised tax cuts along all income levels.

The Trump Tax Proposal

We've covered the President's tax plan in great detail in this space, and you can read about it here and here. But as a reminder, here are the highlights:

• The current seven-bracket system applied to ordinary income -- 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% -- would be simplified and reduced, resulting in three tax rates: 12%, 25%, and 33%.
• The net investment income tax, which tacks an additional 3.8% surtax on to interest, dividends, rental and royalty income earned by the wealthiest 2%, would be eliminated.
• The alternative minimum tax and estate tax would be eliminated.
• The corporate tax would be reduced from 35% to 15%, while all income earned by "flow-through" entities -- partnerships and S corporations -- would be taxed at that same 15% rate.

Distribution of the Trump Tax Proposal 

As measured by the erstwhile eggheads at the Tax Policy Center, the Trump plan would result in total tax cuts of $6.2 trillion over the next ten years. Now that is certainly a massive tax cut. But is for the middle class? Or for someone else?

According to the TPC, of the $6.2 trillion in cuts, the richest 1% will enjoy 47% of those cuts, or nearly $3 trillion over ten years. The middle class, however -- should we choose to define it as those taxpayers in the wealthiest 20% to 80% of the population--would receive only 20% of the tax cuts combined. Put into simpler terms, here is how the different income classes would benefit from the President's plan:

As you can see, the middle class, on average, will have an extra $1,500 or so to spend each year should the President's plan, as proposed, come to fruition. Those in the top quintile, however, will have an extra $16,660. And before you reply, "well, of course the dollar savings are bigger, they make more money," remember to look at the percentage column, which confirms the plan's regressivity, meaning it disproportionately benefits the richest taxpayers on a percentage -- rather than absolute dollar -- basis.

If we focus on the upper reaches of the income scale, the impact becomes more dramatic. Consider the following:

The large reductions in ordinary tax rates and those imposed upon business income, when coupled with the elimination of the estate tax -- results in truly massive cuts for the richest taxpayers in America: with annual savings of over $18,000 going to the top 5%. From a percentage perspective, while the middle class will experience a 1-2% increase in after-tax income, the richest 20% will see a 6.6% rise, while the top 1% will have 14.2% more after-tax income under the Trump plan as compared to current law.

GOP Tax Plan

Now, perhaps you're thinking, "Well, maybe President Trump has a different plan in mind. After all, haven't Speaker of the House Paul Ryan and Chairman of the House Ways and Means Committee Kevin Brady offered their own plan for tax cuts? Couldn't their plan more evenly distribute the savings?"

In their 2016 "Blueprint for Tax Reform," Ryan and Brady did indeed propose sweeping tax cuts of their own, amounting to $3.1 trillion over the next ten years. (You can read about the specifics here.) They have, however, somehow managed to make their proposal even less progressive that the President's plan, with the richest 1% getting nearly 77% of the tax cuts, leaving the middle class only 2.5% of the savings. It looks like so:

Under the GOP plan, middle-class taxpayers will get an annual tax break of $120 - $410, less than half of that offered by the President's plan. Meanwhile, the richest 20% of the country will, on average, enjoy additional after-tax cash of nearly $12,000, with the richest 1% getting an average tax break of $212,000. Again, the disparity isn't reconciled on a percentage basis, as the middle class will experience an increase in after-tax income of less than 1%, while the richest 1% will see their after-tax income rise by 13.4%.

In summary, whether it's President Trump's plan or the GOP proposal that becomes law, middle-class taxpayers will undoubtedly  get a tax cut. How "massive" you deem it to be, however, will depend in large part on your ability to stick your head in the sand and ignore the huge windfall reaped by the richest 1%.

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