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6 Ways the 2017 Tax Law Hurts Low- and Moderate-Income Households


The 2017 tax law is fundamentally flawed and largely left behind low- and moderate-income Americans, CBPP’s Chye-Ching Huang told the House Budget Committee yesterday. As she explained, the law doesn’t address the economic challenges that low- and moderate-income people face, and it includes provisions that will hurt many of them.

For example, it:

  1. Risks harming workers’ wages and workplace standards due to its pass-through deduction. The law’s 20 percent deduction for pass-through businesses overwhelmingly benefits the highest-income filers. Moreover, it may fuel a move towards “fissured workplaces” because it creates an incentive for firms to buy workers’ services without employing them directly. Examples include hiring workers as “independent contractors” instead of as employees, or by hiring workers through another firm (such as contracting out janitorial services to another firm). Workers employed in some of these arrangements tend to be paid less than workers that firms employ directly, extensive evidence shows.
  2. Retains and creates incentives for companies to shift profits and investment offshore, which risks weakening workers’ wages. The law moves the U.S. international tax system towards a “territorial” system, where most profits that a U.S. parent company earns from its foreign subsidiaries aren’t subject to U.S. tax under certain conditions. That risks creating a big, permanent incentive for U.S. multinationals to shift overseas not just profits on paper but also actual investment, in ways that could hurt U.S. workers’ wages.
  3. Leaves millions more people uninsured or facing higher premiums. The law repealed the Affordable Care Act’s requirement that most people enroll in health insurance coverage or pay a penalty. In 2019 alone, eliminating that penalty will raise the number of uninsured by 4 million and raise premiums in the individual insurance market by about 10 percent, according to the Congressional Budget Office.
  4. Erodes the Earned Income Tax Credit (EITC) for millions of working-class households. The law uses a slower measure of inflation to adjust tax brackets and other tax provisions each year. Over time, this will raise taxes across the board. And for low- and moderate-income families, it means the maximum EITC will rise more slowly. By 2027, a married couple making $40,000 with two children will see their federal EITC shrink by $283 (from $5,025 to $4,742), compared to what it otherwise would have been.
  5. Ends the Child Tax Credit (CTC) for 1 million children, who are overwhelmingly “Dreamers.” The law ends the CTC for 1 million children lacking a Social Security number in low-income working families — children who are overwhelmingly “Dreamers” with undocumented status brought to the United States by their immigrant parents.
  6. Adds $1.9 trillion to deficits from 2018 to 2027, which will increase the pressure to cut critical economic security programs and investments. More baby boomers are retiring, which translates into higher Social Security, Medicare, and Medicaid needs, and the nation needs to address years of underinvestment in priorities like basic infrastructure, child care, job training, and to face new challenges like climate change. The government will need more revenues, not less, to face these challenges.

    Further, even before adding $1.9 trillion to deficits for tax cuts tilted to the top, the law’s drafters made clear that they’d prefer to address deficits by cutting programs that help families of limited means afford health care, food, housing, and other basic needs. Low- and moderate-income Americans should not now be left holding the tab for tax cuts tilted to the top, through cuts to, or underinvestment in, critical priorities. Instead, lawmakers can reverse course and raise substantially higher progressive revenues to meet national challenges.

Overall, the 2017 tax law will boost the after-tax incomes of households in the bottom 60 percent by 1.0 percent by 2025 — far less than the 2.9 percent gain for those in the top 1 percent, the Tax Policy Center estimates.