Tax Bill: Myths and Facts

Debunking the Tax Myths:

This is not tax reform similar to the “once-in-a-generation tax reform” agreement reached in 1986 by Ronald Reagan and Tip O’Neill.  Rather, it is a budget-busting set of tax cuts skewed towards upper income taxpayers and justified by oft-repeated myths, as explained below.

  • This is not a middle class tax cut.  The tax bill is skewed towards wealthy Americans.  Both bills reduce the top tax rates for wealthy Americans either by raising the threshold or reducing the rate, itself. Cutting the corporate rate primarily benefits wealthy Americans. Elimination of the corporate and individual Alternative Minimum Tax (AMT) benefit only wealthy Americans.  Elimination or narrowing of the estate tax would benefit only wealthy families with estates worth more than $11 million (the current threshold).  The increase in the standard deduction and child credit for lower- and middle-income families is partially offset by repeal of the personal exemption and other deductions.  According to the Tax Policy Center, “on average in 2027, (under the Senate bill) taxes would rise modestly for the lowest-income group, change little for middle-income groups, and decrease for higher-income groups.”  According to the Joint Tax Committee (Congress’ nonpartisan scorekeeper) by 2027, under the Senate bill, taxpayers earning under $75,000 would see their taxes increase, and nearly half of the total tax cuts go to people earning over $1 million; under the House bill, one-third of the cuts would go to people earning over $1 million.

 

  • The bill will not create millions of jobs.  There is simply no historical evidence that cutting taxes on wealthy individuals or corporations will incentivize major job-creating domestic investments.  This is a myth designed to justify tax cuts for wealthy Americans.  A far more certain, direct, and productive domestic job creator would be significant federal investment in infrastructure, similar to President Eisenhower’s National Highway System.

 

  • Instead of growing the economy, the bill will increase the public debt — weakening the economy and triggering entitlement cuts that lower the standard of living. While rate cuts and immediate expensing may generate new economic activity at first, those growth effects would be reversed over time by the effects of higher budget deficits. The Penn Wharton Budget Model estimates that, after accounting for economic growth, the Senate bill would increase deficits up to $1.6 trillion and the House bill by $2.0 trillion over the next decade. The debt increase would come at a time when federal borrowing has already grown to unsustainable levels that crowd out private investment and risk sending the economy into a fiscal “death spiral” where annual interest payments become so large that the Treasury is borrowing enormous sums of money simply to pay interest on the existing debt.  According to the nonpartisan Committee for a Responsible Federal Budget, the tax bill could push federal debt held by the public to nearly 100 percent of GDP within 10 years.  Moreover, under the Statutory Pay-As-You-Go-Act of 2010, the deficit increases caused by the tax bill would trigger automatic cuts in Medicare, farm price supports  and other non-exempt entitlement programs; link here for details.

 

  • Farms and small businesses do not need estate tax relief.  Claims that eliminating the estate tax is necessary to protect farms and small businesses is a hoax to justify cutting taxes by tens (and eventually hundreds) of billions of dollars for the wealthiest families. Nonpartisan facts about the estate tax: under current law, 99.8 percent of estates currently owe no tax according to the nonpartisan JCT and less than one-half of one percent of farm estates currently owe estate tax according to the USDA; the largest estates consist mostly of capital gains that have never been taxed; U.S. estates are taxed less than most other market economies according to OECD nonpartisan data; repealing the estate tax would increase the public debt, slow the economy, and kill jobs; and repealing the estate tax would negatively impact our democracy by further concentrating wealth in billionaire families.

 

  • The U.S. is not the most highly-taxed country in the world.  Proponents of the tax cuts falsely claim the U.S. is the most highly-taxed country in the world.  The U.S. is among the lowest-taxed countries in the OECD (the organization of 35 democracies with market economies).  Including taxes at all levels of government (federal, state, local), the U.S. has the 4th lowest combined tax rate at 26%; the OECD average is 34%.  Only Mexico, Chile, and Korea had lower tax rates among democratic market economies in the most recent OECD analysis.

 

  • The U.S. does not have the highest corporate income taxes in the world.  Proponents of the corporate rate cut claim the U.S. has the highest corporate taxes in the world.  In fact, the effective corporate tax rate in the U.S. is about average.  Only the statutory corporate rate is higher than other market economies, but that ignores deductions and credits which significantly lower actual taxes paid.  CBO estimates that the effective corporate tax rate was 19 percent in the United States in 2012.