Corporate elites and wealthy Americans celebrated when Congressional conservatives and President Trump rolled out the so-called “Tax Cuts and Jobs Act” (TCJA) late last year—and with good reason. The TCJA was overwhelmingly regressive, sending a disproportionate share of tax relief to high-income households that have benefited from rising income inequality for decades.
Analysis confirms this regressivity. The Institute on Taxation and Economic Policy (ITEP) used its micro-simulation model to assess the impact of the TCJA in all fifty states. The ITEP model looks at final tax incidence, which takes into account business taxes that are shifted on to consumers (through higher prices) and employees (through reduced wages). ITEP groups households into seven income groups, ranging from the poorest 20% to the richest 1%. ITEP estimates the TCJA impact in 2019 and 2027, based on projected income levels shown below.
ITEP estimates that the 60% of Minnesota households with the lowest incomes will receive only 16% of total TCJA tax relief in 2019. Meanwhile, the top 5% will receive 49% of the total relief and the top 1% will receive nearly 22%.
The average tax cut received by the poorest 20% of household is $140, while households in the top 1% will receive an average tax cut of $42,700. In other words, for every $100 dollars of tax relief received by the average household in the top 1%, the average household in the poorest 20% will receive 30 cents.
The “effective tax rate” (ETR) equals taxes (or the change in taxes) as a percent of income. On this metric, the 2019 benefit of the TCJA again skews toward high income households.
As a percent of income, the poorest 20% of households receive a 2019 ETR reduction of just 0.9% under the TCJA—the lowest of any income group in the state. By contrast at the other end of the scale, the “next 4%” (i.e., the top 5% excluding the top 1%) receive an ETR reduction of 3.5%, the largest of any income group. The ETR reduction for the top 1% is considerable smaller than the ETR reduction for the next 4%. The drop in the ETR reduction from the next 4% to the top 1% occurs because the individual income tax reduction as a percent of income is much smaller for the top 1%—likely due to the loss of itemized deductions. Even so, the top 1% receives the second-largest 2019 ETR reduction of any income group in the state.
As regressive as the impact of the TCJA is in 2019, it is much more regressive in 2027. According to ITEP:
The impacts on low- and middle-income people are worse in 2027 because the provisions that directly affect families and individuals all expire after 2025—except for a provision that raises taxes by adjusting the tax code to a slower measure of inflation called the “chained” consumer price index (chained CPI). This means that in years after 2025, the tax provisions relevant to families and individuals will return to what they are today, except that chained CPI will gradually push households into higher income tax brackets and will make most deductions and exemptions less generous over time.
While 2027 individual income taxes increase under the TCJA, corporate tax breaks remain in place. As a result, total tax reductions under the TCJA drop considerably, with the remaining relief distributed in a more regressive fashion. The poorest 20% of Minnesota households will see a tax increase in 2027, while the second 20% will see approximately zero tax relief. The third 20%—in the middle of the income distribution—will see only 5.0% of the total 2027 tax relief. Because of the tax increases among the poorest 20%, the aggregate share of total TCJA tax relief received by the bottom 60% of Minnesota households in 2027 will be less than 3% of the total, while the top 1% will receive nearly 43%.
In 2027, the average ETR of the poorest Minnesota households will increase as a result of the TCJA. Meanwhile, the top 1% and the next 4% will continue to see the largest ETR reductions.
The Suits index measures tax regressivity or progressivity. A negative Suits index denotes a regressive tax system. The Suits index for the 2019 TCJA tax changes in Minnesota is -0.090, which is significantly regressive. By 2027, the Suits index for TCJA tax changes plummets to a horrendously regressive -0.401.
Low-income households can take little consolation from the pay hikes they will allegedly receive as a result of TCJA corporate tax cuts. An earlier North Star analysis revealed that—even if we make the unlikely assumption that pay hikes attributed to the TCJA were actually the result of the TCJA—the resulting pay increases amount to a tiny fraction of the total tax relief businesses are expected to receive in 2019.
ITEP data shows the TCJA to be extremely regressive, both in Minnesota and nationwide. The richest households receive the largest tax cuts, thus exacerbating already high levels of income inequality. These regrettable outcomes were purchased at the cost of escalated federal debt that leaves the nation less able to respond to the next recession. Such is the price of conservative trickle-down economics.