The Senate Bill Really Is Regressive
(Or Why You Shouldn’t Use Percent Change in Tax Liabilities!)
Last night, the Joint Committee on Taxation released new distributional tables showing the effects of the newly introduced Senate tax legislation across the population. Upon the tables’ release, Senate Finance Committee Republicans declared that the tables demonstrated that their tax plan was progressive with the middle class winning the most, and a number of news reports have picked up on this.
However, the legislation is in fact regressive, by any truly meaningful measure. These claims rely on the use of a misleading distributional metric and the opacity of deficit-financed legislation, hiding who really wins and loses in the end.
Take a look at two figures below showing the effects of the Senate bill in 2027 and adjusted to include the effects of estate tax cuts which JCT leaves out of its estimates. I use the 2027 figures to capture more permanent effects.(UPDATE: And, as promised, I have now posted distributional tables for 2019 — the first year the corporate rate cut is in effect in the addendum showing that the plan is regressive then too.)
As these show, when you look at how these tax bills actually effect the lives of families, it is clear who wins the most: the top. Yes, millionaires — as in earning $1 million per year — apparently get somewhat less as a percent of after-tax income than almost-millionaires. But that doesn’t exactly sound like a progressive change, when those millionaires still get double as much as a share of their incomes as an average family making $40,000 to $50,000 — and one hundred times as much in average dollars per family.
Finally, when you take into account who is likely to pay for the deficit-financed tax cuts in the end, low- and middle-income Americans arelikely to not just end up winning less, but actually be left worse off helping to pay for the tax cuts at the top.
Some Better Than Others: Different Metrics, Different Answers
However, proponents of the Senate bill are using the JCT distributional tables to argue that their tax bills are in fact doing more for those with lower incomes than with higher incomes. How can this be? It’s all about misleading measures of tax progressivity (and a little bit about JCT leaving out the estate tax). These claims tend to rely on two closely-related distributional measures: percent change in tax liability and change in share of total taxes paid. These two metrics are designed to mislead as to the actual effects of tax changes on people’s lives, as well as to the likely long-run effects of the legislation.
The table below shows the distribution of the tax changes as of 2027 under House and Senate bills according to four measures: (1) Average dollars per household, (2) Percent change in after-tax income; and (3) Percent change in tax liability. This uses JCT numbers for distribution adjusted to include changes in the estate and gift tax reductions based on Tax Policy Center distribution of that.
The table shows that in absolute dollars and as a percent of after-tax income, the House and Senate bills are regressive — those at the top get the largest tax cuts under both pieces of legislation. Yet, the tax cuts don’t look as regressive — and can even look progressive — looking at the percent change in tax liability by income class.
Problem 1: Percent Change in Tax Liability Says Nothing About How People Live
In looking at distributional tables, it’s key to ask “why.” Why do we care about distributional analysis?
If it has to do with caring about how people live and the gap between the top and the rest, then we have to look at metrics that gauge how those living standards are changing. And, looking at these tables, there are two metrics that help answer that question: absolute dollars and percent change in after-tax income.
Absolute dollars show how people’s living standards rise in dollars; percent change in after-tax income looks at this as a percentage matter. Which of these is more meaningful? Well, that raises questions about which matters more, the absolute gap between people (so so and so earns $X more than someone else) or relative inequality (so so makes X times more than someone else). This blog post is not the place to litigate that particular question. As I have said before, I lean toward percent change in after-tax income — though both at least reflect on meaningful changes on relative living standards across the income spectrum. After all, someone may rightly judge a tax change to be unfair — and worsening the distribution of resources in some meaningful sense — if it delivers an average tax cut of nearly $50,000 to those making over $1 million and an average tax cut of $480 to those making $40,000 to $50,000, like the Senate bill does.
That brings us to percent change in tax liability. This metric says nothing about effects on the people’s living standards. And, if a tax system is progressive to begin with (with rising tax rates with income), any change that cuts tax liabilities by the same percent across the board will always result in larger gains in living standards for those at the top (both in absolute and percentage terms) than those below.
Importantly, this misleading metric is directly related to share in taxes paid. If taxes are cut by the same percent across the board, then share of taxes paid will remain the same. So, if a tax cut is distributionally neutral (or progressive/regressive) in terms of percent change in taxes paid, it will be the same in terms of change in share of tax liabilities. And both metrics suffer from the same flaw — a complete disconnect from living standards.
Just to give an extreme example to illustrate the problem: Let’s say that there’s a very progressive tax system in which the top pays a very high tax rate and everyone else pays a much lower tax rate. Then, the tax system is essentially eliminated with an across-the-board tax cut that eliminates 99 percent of the system. In that case, the top clearly has won the most from the change — their living standards will rise the most by any meaningful metric. But, tax liabilities have been cut by the same percent across the board and each income class continues to pay the same share of a much, much smaller system. But, who cares? The system after all barely exists anymore. The advocates for the House and Senate bills are basically engaging in this exact exercise even if a less extreme version.
And, for those who would like to read oh so much more about these metrics and which ones have meaning and which don’t, I’d suggest a student note by a then-aspiring legal academic. And please excuse anything you dislike as youthful indiscretion.
Problem 2: In the Long-Run Low- and Middle-Income Americans Likely to Lose
The second problem with this entire exercise by tax cut advocates — and especially their use of metrics like percent change in tax liabilities — is that it is specifically designed to hide who will in fact win and lose in the end.
If the tax bill were fully paid for, there wouldn’t be this big distributional debate. The tables would clearly show who is paying more on average and who is paying less on average. There might still be a debate about who, among those winning, is winning more, but winners and losers would be clear.
But, this tax bill isn’t fully paid for. It increases deficits over the next decade by $1.5 trillion. And while there are many low- and middle-income Americans paying higher taxes under the legislation, all income classes get a tax cut on average under the Senate plan — for now. And, it is just for now. Eventually, these tax cuts will be paid for, and then the question will be who covers the bill.
The Republican leadership has suggested how they intend to pay for these tax cuts and reduce federal deficits — through cuts to programs and services that disproportionately benefit low- and middle-income Americans. As a result, it’s not just that low- and middle-income Americans’ living standards won’t go up as much as those at the top. It’s that their living standards are likely to suffer in the long-run as they are left holding the bag.
Put differently, tax cut advocates might be justified in using metrics like percent change in tax liabilities if they were planning to pay for the tax cuts over the long run with very progressive measures — perhaps like expanding the progressive tax system and replacing the revenue that way. But, that isn’t the plan! The plan is not to cut the size of the progressive tax system and then expand it again down the line. The plan is for the progressive tax system to be permanently smaller and for other much more regressive measures to be used to fill in the gap.
So, what could a long-term distribution look like? See the figure below showing the distribution of the tax changes (based on the JCT figures) assuming the Senate tax cuts are eventually financed by measures that are proportional to after-tax income. This in fact is much more progressive than what Republicans are aiming to do. The result: only the top wins and everyone else loses.
So, it is not just that the metrics used by the Republicans are wrongly showing the tax changes as doing more for the middle than the top; they are likely wrong in sign for those with middle- and low-incomes. They are likely losers under Republican plans in the years ahead, not winners.
Addendum: Distribution of Tax Changes in 2019
JCT supplies several years of distributional tables. I have focused on 2027 since that tends to better capture permanent effects. However, I’m also now including below the distribution for 2019, working off of JCT numbers and again adjusting to include the effects of estate tax cuts.