Trump Tax Plan: Will GOP reform really help the middle class? 3 ways the “miracle” is a misnomer

ByJames Dennin

President Donald Trump unveiled his latest tax plan in a speech in Indianapolis Wednesday, insisting the proposal would benefit ordinary Americans more than the wealthy and characterizing the plan as “not good for me.”

“The biggest winners will be middle-class workers,” Trump said, as the New York Times reported, further describing his hopes for a “giant win for the American people” to “begin the middle-class miracle once again.”

But economists Mic consulted said this characterization is overly optimistic at best. While the latest plan may end up providing some tax relief to certain middle-class families, it cuts far more for higher-income groups — with little clarity about how lost tax revenue will be offset. On Twitter, prominent economist Justin Wolfers even went so far as to call Trump’s claim that his plan had “little benefit for the rich” a “lie.”

“There’s this weird way in which they’ve tried to claim that this won’t help the rich,” Wolfers said in an email interview with Mic. “Of course, not every rich person will benefit from this tax package. But at this point it looks like [the] wealthy are likely the biggest winners.”

Furthermore, even the parts of the plan that would benefit the middle class — particularly the idea to double the standard deduction — could be negated by lost benefits, like the personal exemption, as well as certain deductions for lower- and middle-income families, economists told Mic. And it’s still unclear whether the proposed bump in the lowest tax bracket (from 10% to 12%) would not affect lower- and middle-class workers despite assurances to the contrary; details are lacking and the plan would face a winding road through Congress.

“For the middle class, this feels more like tax simplification than tax relief,” Andrew Stettner, senior fellow at the Century Foundation, said. “It’s going to affect people mostly [by a few hundred dollars for the year] at best in terms of tax relief, if you’re a working-class person.”

Here are three ways the Republican tax plan isn’t quite what Trump makes it out to be.

1. The promised middle-class benefits are likely overstated.

The priorities outlined send a strong signal that the bill will do little for the middle class, Hunter Blair, an economist at the Economic Policy Institute, said. “They could have just doubled the standard deduction, but that’s not what they did. They doubled it and got rid of the personal exemption,” Blair said. “Trump’s campaign plan did something similar and ended up raising taxes for a lot of lower-income families” once more details were assessed.

Why is that so important? Without the personal exemption, a lot of families wouldn’t be able to take benefits for supporting other members in their household, like children or dependent parents. Because the doubling of the standard deduction is paired with a loss of the exemption, the real benefit for taxpayers would be more like 15% or less, not 100% (aka doubling), as Business Insider’s Josh Barro points out.

Other Americans could also be affected negatively. For one, taxpayers in high-tax states like California or New York may lose the ability to write off local and state taxes. And yet others could be affected in that they would no longer get enough value to make the charitable and mortgage interest deductions worthwhile.

More than 10 million American households earning $100,000 or less per year currently use the mortgage interest deduction, while a similar number benefit from the charitable deduction, as CNBC reports. As the Wall Street Journal’s Richard Rubin pointed out on Twitter, the perks would likely no longer help anyone but the very rich.

2. Social safety net cuts could be needed to make up for lost tax revenue.

Trump has often said that he wants to pass the largest tax cut in history, which could create another problem for the middle class — a group that relies more heavily on safety net programs like Social Security and Medicare. These expensive discretionary programs could be targets of cuts, Stettner said.

“The most important thing for the middle class is that this very large tax cut ... has the potential to starve Social Security and Medicare,” Stettner said, “which are the two most important things the government does for the middle class.”

Close to two-thirds of the roughly 64 million Social Security recipients in 2013 relied on it for about half of their income, according to the Social Security Administration. About 58 million elderly and disabled Americans relied on Medicare in 2017, according to the Centers for Medicaid and Medicare Services.

Even if these entitlements are not cut, other cautionary tales abound: A similar 2012 tax reform program at the state level in Kansas resulted in reduced social services for residents, including underfunded schools and delayed road projects — and led to lagging economic and employment growth, as the left-leaning Center on Budget and Policy Priorities has pointed out.

3. The proposed tax cuts could exacerbate income inequality.

A final reason the president claims his tax plan will help the middle class is that it cuts corporate taxes heavily from 35% down to 20%, which he says will create jobs.

But there is good reason to be skeptical that corporate tax cuts will achieve this: The CBPP estimates that only about 20% of the revenues from corporate tax cuts flow to employees, a figure that also includes managers. The nonpartisan Congressional Budget Office pegs that number at about 25%. The rest — aka the majority — of the savings from corporate tax cuts tend to go to highly-compensated executives and shareholders.

Overall, doling out substantial tax benefits to higher-income groups could exacerbate income inequality — which is already growing. The bottom 90% of the U.S. population’s share of the wealth already fell to a record 49.7%, according to a recent Federal Reserve report, the lowest reading in the survey’s history. Some economists have argued higher levels of income inequality can lead to political instability and jeopardize economic growth.

Of course, until all of these specific issues in the proposal get worked out, it’s difficult to know how the tax plan will affect families at the household level.

In the meantime, this helpful Washington Post graphic can show your which tax changes are most likely to benefit your income group. And here’s the full video of Trump’s tax speech Wednesday.

Sign up for the Payoff — your weekly crash course on how to live your best financial life.