David Leonhardt: A Tax Plan to Turbocharge Inequality

  • David Leonhardt
  • The New York Times
5:42 p.m Monday, Dec. 18, 2017 Opinion
House Ways and Means Chairman Kevin Brady (R-TX) discusses progress on the tax reform bill with reporters at the U.S. Capitol on December 15, 2017 in Washington, DC. (Photo by Win McNamee/Getty Images)

The Republican tax bill is an audacious attempt to accelerate the economic trends of the last half-century.

If you’re a fan of these trends — rapidly rising inequality and stagnant middle-class incomes — you should love the bill. If you’re not a fan, you can at least take comfort in knowing that you’re in the majority of Americans, as polls consistently show.

During the last few decades, the rich have not only enjoyed the largest pretax raises, by far. They have also received big tax cuts. The middle class and poor, meanwhile, have suffered from slow-growing incomes — and from overall tax rates that are higher today than in the mid-1960s.

The first part of that story is widely known. The rich have gotten richer, for a whole variety of reasons. The second part is less known. But it’s also crucial. The great tax-cutting revolution of the last half-century hasn’t actually been a tax-cutting revolution for most Americans.

True, they have benefited from a series of cuts in income-tax rates, signed by Lyndon B. Johnson, Ronald Reagan, George W. Bush and Barack Obama. At the same time, though, another tax has been rising. It is the quiet giant of federal tax policy: the payroll tax.

It funds Social Security and Medicare, and it has been rising in response to the aging of society and rising medical costs. It increased from 2 percent just after World War II to 6 percent in 1960 to 12.4 percent in 1990, where it is today. It has risen so much that it’s now the largest tax that 62 percent of American households pay — larger than the income tax, which gets much more attention.

The increases in the payroll tax have more than offset the declines in the income tax for most middle-class and poor families. They now face higher total tax rates than a half-century ago.

This makes no sense in an economy where wealthy households have enjoyed the largest pre-tax raises. They are bringing home many more dollars, and each of those dollars is being taxed less than in the past. The middle class and poor are on the unhappy end of both trends.

Obama tried to reverse these broad trends and had some success. The core of his domestic policy, in fact, was fighting inequality. He substantially raised taxes on the rich, while keeping the Bush tax cuts for the middle class and poor. He also expanded health care and other middle-class programs. Before Obama, there were also bipartisan efforts to expand Medicare and low-income tax credits.

But these efforts haven’t been nearly enough to make up for the soaring pre-tax inequality — or even to make the tax code more progressive than it used to be. Middle-income families face a higher rate than a half-century ago: 28.6 percent in 2014, versus 24.8 percent in 1964. The economist Gabriel Zucman notes that the increased taxes on lower-income families have made it harder for them to save and invest. “It’s part of the reason you have such high wealth inequality,” he said.

Now President Donald Trump, Mitch McConnell and Paul Ryan are trying to widen inequality even further. Their tax bill doesn’t touch the payroll-tax rate — again, the single biggest tax that most households pay. The bill does cut income taxes for the middle class, but only modestly and only temporarily.

The tax cuts benefiting the wealthy, including cuts to the inheritance tax and the corporate tax, are much larger and permanent.

Researchers at the Tax Policy Center, a vital source of independent analysis on a plan that’s been rushed through Congress, have estimated the long-term effects on each income group. Crucially, their estimates don’t ignore the bill’s impact on the deficit — and thus include the spending cuts that will eventually need to follow.

Even if those cuts fall equally on each household (and, in reality, Republican leaders favor cuts that fall disproportionately on the middle class and poor), the tax bill amounts to an enormous effort to increase inequality.

Republican leaders have evidently decided that most Americans deserve more of what they’ve had during the past few decades — more income stagnation and more inequality. Polls have repeatedly shown that most Americans disagree, but Congress is forging ahead anyway. It’s an affront that deserves to be a defining issue in next year’s midterm campaigns.

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