TCJA: A boost for poorer Americans

Sometimes conventional wisdom is simply wrong.

The debate over extending Donald Trump’s signature first-term tax cut, the appropriately-titled Tax Cuts and Jobs Act (TCJA), is almost inevitably cast as a question of “tax cuts for the rich.” In reality, however, low-income Americans were among the biggest winners, both directly and indirectly, from the 2017 tax bill, and would likely be among those hurt most if they are allowed to expire.   

It is true that, in dollar terms, wealthier Americans received the lion’s share of the tax cuts under the TCJA. That shouldn’t be a surprise since that is who pays most income taxes: the top 10 percent of incomes pay 76 percent of federal income taxes, while the bottom half pays just 2.3 percent. Virtually any tax cut is going to benefit those who actually pay taxes. 

However, the TCJA did significantly reduce taxes for low-income workers, including reductions in tax rates, a doubling of the standard deduction, an increase in the Child Tax Credit, and an expansion of 529 savings accounts, among other provisions. 

Overall, roughly 80 percent of taxpayers received a tax cut, 15 percent saw no change in their taxes, and 5 percent received a tax hike. Most of those in the latter two categories were high-income earners subject to the cap on deductions for state and local taxes.

In fact, looking at the size of the tax cut as a portion of the taxes that people were paying, workers in the bottom half of incomes saw a 9.3 percent reduction in their tax burden, compared to 3 percent for the top 10 percent of earners, and just 0.04 percent for those in the top one percent of incomes. The tax code actually became more progressive following passage of the TCJA. Before the TCJA, the wealthiest one percent of Americans paid 38.6 percent of federal income taxes. After TCJA, that rose to 42 percent.       

Low-income Americans also appear to have received significant indirect benefits from the TCJA. While correlation is not causation, it is hard to ignore that income inequality declined after passage of the TCJA. Real wages grew 40 percent faster from January 2017 to February 2020 compared to the period from July 2009 to December 2016. Low-wage workers, in particular, saw their wages go up under TCJA and the rate of increase was twice as fast for the bottom 10 percent of incomes as for the top 10 percent. And, the real wealth of the bottom half of earners rose three times faster than for the top one percent. Earnings for blue-collar workers rose more than $1,400 above the pre-TCJA trend line. Overall poverty and child poverty rates declined. Of course, it would be a mistake to attribute all of that to the TCJA, but would be equally mistaken to suggest that this was mere coincidence. 

Failure to extend the TCJA would likely undo much of this. The overwhelming majority of Americans, including most low-wage workers, would see their taxes rise. American businesses would become less competitive and would be encouraged to avoid higher taxes by relocating abroad. Economic growth, already shaky, would likely stall. It’s not just the rich who would feel the impact.

There are, however, two important caveats.  

First, the past may not be prologue. The economic environment is not the same as it was in 2017. In particular, the damage wrought by Trump’s tariffs may mean that extending TCJA may not generate the same economic growth as did the original bill. Moreover, for many low-income workers, the tax reduction under TCJA will likely be less than they will pay due to higher tariffs. Policymakers shouldn’t simply extrapolate from past results and project them forward. (That said, extending TCJA offers an opportunity to at least mitigate some of the harm generated by the tariffs.)

Second, the failure to address spending means that the tax bill could blow a huge hole in the deficit. According to the Committee for a Responsible Federal Budget, TCJA extension, as currently budgeted, would add $4.5 trillion to the national debt over the next 10 years, and as much as $37 trillion by 2054. This is clearly unsustainable. Unless Congress is willing to do the hard work of getting spending under control, much of the good coming out of the TCJA will be undone. 

Extending the TCJA is more than justified. Doing so will benefit the economy as a whole, and particularly those low-Americas who are struggling today. But this should just be the start of an economic agenda, not the end.