The Tax Cuts and Jobs Act of 2017, signed into law by the Trump administration, led to a reduction in the corporate tax rate by 14%, a decrease in individual income tax rates, and an increase in the standard deduction. William G. Gale from The Brookings Institution highlighted that many of the household tax reforms within the legislation will expire in 2025. This implies that the winner of the election will have the choice to either push for an extension of the law or let it expire.
The 2017 Tax Cuts and Jobs Act, which was enacted by the Trump administration, resulted in a 14% reduction in the corporate tax rate, lower individual income tax rates, and an increase in the standard deduction. According to William G. Gale of The Brookings Institution, several of the household tax reforms included in the bill will end in 2025. This means that the winner of the election will have to decide whether to prolong the legislation or allow it to end.
Why exactly is that?
Trump will probably prolong the 2017 legislation. According to Smith, "under Republican administrations in general, tax collections go up as rates get cut," indicating that the top 1% pay more in taxes when tax rates are decreased.
How does that make sense?
Smith elaborated that the majority of individuals would find it astonishing to discover that over half of the total taxes are paid by the upper 1%. He stated, "The average person fails to grasp the extent of the tax responsibility placed on the wealthiest 1%, leading them to seek ways to circumvent it. By lowering [tax rates], the top 1% engages in less tax evasion and contributes more." This unexpected occurrence was most effectively elucidated by Smith's academic mentor at The University of Chicago, Arthur Laffer, who introduced the Laffer Curve illustrating that reducing taxes paradoxically leads to higher tax income.
Does the data always support this?
It is possible, but not guaranteed. The Laffer Curve should be seen as a starting point for theory rather than a conclusive hypothesis. According to a publication by the Mississippi Institutions of Higher Learning, Laffer himself stated that the impact of tax rate changes on revenues depends on various factors, including the existing tax system, the time frame, the potential for underground economic activities, the current tax rates, and the presence of legal and accounting loopholes.
Smith stated that "the lower-income individuals hardly pay any taxes." He also mentioned that the real estate and sales taxes are the ones that affect the poor the most, which is unfortunate since the sales tax cannot be altered. However, Smith argued that the 2017 tax cuts, which mainly favor the wealthiest 1%, would not transfer the tax burden to the poor.
What about residual effects?
Some may argue that the impact on the less fortunate is primarily residual and that tax cuts for the affluent could lead to a reduction in funding for government services such as Social Security and Medicaid, which are relied upon by lower-income groups. However, based on Smith's assessment, this reasoning may be flawed.
If tax cuts result in increased revenue from the top 1%, then the funding would still be available. The conservative rationale for cutting government programs seems to be a way to appeal to a Republican base that opposes entitlement programs favored by Democrats. However, the potential consequences of losing these programs would remain unchanged. Trump attempted to repeal and subsequently undermine the Affordable Care Act.
Do others agree?
While Smith's assessment may have been supported by others up until now, some disagree on future projections in the event of a Trump win.
According to a new analysis published in May 2024 by economists Kimberly Clausing and Mary E. Lovely of the Peterson Institute for International Economics, there is an additional factor to consider - Trump's newly proposed tariffs (i.e. import taxes). Clausing and Lovely found that these tariffs "would hurt low-income Americans the most." Specifically, Trump has recently proposed a 10% universal tariff on goods imported from every country and at least a 60% tariff on all goods made in China. Based on research regarding 2018 imports, the economists found that previously imposed tariffs were not "paid for" by other countries; instead, U.S. consumers ended up with higher prices.
The analysis indicates that because lower-income Americans spend a larger percentage of their income, "the tariffs would reduce after-tax incomes by 3.5% for those in the bottom half of the income distribution and cost a typical household in the middle of the income distribution about $1700 per year." In contrast, the upper 1% would see a 1.4% increase in after-tax income.
Therefore, in this model, the newly proposed tariffs would offset any marginal income gains for the poor from an extension of the 2017 tax cuts, "shifting tax burdens away from the well-off and toward lower-income members of society," as Clausing and Lovely concluded.
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