July 25, 2024

Will Middle-Class America Pay More if Trump Tax Cuts Expire?

The 2017 Tax Cuts and Jobs Act (TCJA) ushered in a significant overhaul of the U.S. tax code. While the legislation promised tax relief for many Americans, a new analysis suggests that extending the law’s temporary provisions could leave millions of middle-class households facing higher tax bills. This potential outcome raises questions about the fairness of the TCJA and the future direction of U.S. tax policy.

The High Cost of Permanence

Extending the tax cuts enacted in 2017 is estimated to cost the government a staggering $5 trillion over the next decade. Despite this hefty price tag, the Tax Policy Center (TPC) reports that 13% of middle-income households could see their tax burden increase if the TCJA’s temporary provisions become permanent.

This seemingly contradictory outcome stems from the way the TCJA altered the tax landscape. The law doubled the child tax credit, a benefit primarily enjoyed by families with children. Additionally, it increased the standard deduction, a change that simplified tax filing for many. However, the TCJA also eliminated or reduced several deductions previously relied upon by middle-class households, such as those for state and local taxes, moving expenses, and alimony payments.

The combined effect of these changes means that some middle-class households, particularly those without dependents who itemized their deductions under the pre-2017 tax code, may be worse off if the temporary provisions are extended.

Unequal Benefits

The TPC analysis further highlights the uneven distribution of benefits under the TCJA. The vast majority of the $5 trillion tax cut would go to households earning over $450,000. This skews the tax burden towards lower- and middle-income earners, raising concerns about the law’s progressivity.

For example, the TPC estimates that extending the TCJA in its entirety would save Americans in the top 0.1% an average of $278,240 per year, while middle-income families would see an average annual saving of only $1,030. This disparity suggests that the TCJA does little to address income inequality and may even exacerbate it.

Political Considerations and Potential Changes

The high cost of extending the TCJA, coupled with its skewed benefits, could become a significant political hurdle even if Republicans regain control of Congress. Analysts suggest that Republicans may be hesitant to add to the national debt, especially during a period of high budget deficits. This could lead to a willingness to consider tax increases, such as a slight hike in the corporate tax rate, to offset the cost of extending individual tax cuts.

Additionally, some provisions within the TCJA itself may be revisited. The deduction for pass-through businesses, a measure intended to benefit small businesses, is estimated to disproportionately benefit high earners. This, combined with its potential distortionary effects on the economy, makes it a potential candidate for elimination. Allowing this deduction to expire could free up $700 billion over ten years, potentially funding the extension of other, more popular, TCJA provisions.

Conclusion

The potential consequences of extending the 2017 tax cuts highlight the complexities of U.S. tax policy. While the TCJA offered tax relief to many, the benefits were not evenly distributed. As lawmakers contemplate the future of the tax code, concerns about fairness, cost, and economic impact will undoubtedly be central to the debate.

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