Income inequality is defined as the disproportionate allocation of household or individual income to a proportion of the population. Thus, the nonpartisan Congressional Budget Office (CBO) reported in 2013 that the top 10% of U.S. families held 70% of the nation’s wealth while the bottom 50% of families held 1%–and that this unequal distribution had worsened from 1989 to 2013. As Robert Reich has said, income inequality is the defining issue in America. Income inequality can be made much worse by a regressive tax code, such as is contained inthe Tax Cuts and Jobs Act that Trump signed into law in December, 2017.
The Tax Policy Center in Washington, DC expects the Act to decrease federal revenue by $7.2 trillion over the next 10 years and another $8.9 trillion in the following decade. Three-quarters of this decline results from reductions in business taxes. We will thus experience higher deficits, expected to dampen the economy and not produce job growth.
In its December, 2017 report, the CBO describes the Trump tax plan as providing more tax benefits to higher income individuals and businesses. For businesses, the Act lowers the maximum corporate tax rate from 33 percent to 21 percent, the lowest since 1939–and it is estimated that corporation tax deductions further lower this to an effective rate of about 18 percent. The business tax cut is permanent (it does not sunset in 2025, unlike individual rates). The Act eliminates the corporate AMT (Alternative Minimum Tax), adding an estimated $40B to the deficit. And the Act raises the standard deduction to 20 percent for pass-through businesses (i.e. S corps, LLCs, sole proprietorships, partnerships) including real estate companies, private equity funds and hedge funds.
For higher income families, the Act doubles the estate tax exemption to $11.2M for individuals and $22.4M for couples, benefiting the top 1%. It keeps the AMT, but phases it out at $500,000 for individuals and $1M for couples. It provides a tax deduction for $10,000/year contributions to 529 plans for tuition at private and religious K-12 schools.
Overall, the Act keeps seven personal income tax brackets, but lowers tax rates (only until 2026). But the Act uses a chained consumer price index, which means that over time, people will move into higher tax brackets. It doubles the standard deduction, but eliminates personal exemptions and most itemized deductions, limiting the mortgage interest deduction to $750K and deduction for state and local taxes to $10K. Significantly, the Act’s doubling of the standard deduction will cause an estimated 21 million Americans to lose the tax benefit of itemized charitable deductions–and nonprofits are projecting serious declines in charitable giving that provides a real safety net for the poor in every community.
The Act expands the deduction for medical expenses (dropping the deduction threshold from 10% to 7.5% of income), but only for 2017 and 2018. Meanwhile, the Act ends the Affordable Care Act mandate for health insurance, which is estimated to cause more than 10 million people to drop their plans, thereby increasing healthcare plan costs for lower-income Americans and reducing the number of healthcare plan providers in every state.
Passive activity bonds, that are utilized by developers of affordable housing, are continued. However, lower corporate tax rates are anticipated to reduce developer interest in affordable housing tax credits.
One big unknown: will the GOP continue to believe in supply-side economics (where tax cuts to businesses and the wealthy lead to economic growth) or, with rising deficits, will they resort to the Reagan-era cuts in social services — and go beyond those cuts to threaten Social Security and Medicare/Medicaid?
Stay tuned and keep resisting!