Vast Majority of Americans Would Likely Lose From Senate GOP’s $1.5 Trillion in Tax Cuts, Once They’re Paid For

This week, the Senate Budget Committee will vote on a budget resolution that would allow Congress to move forward with tax-cut legislation that adds $1.5 trillion to deficits over ten years.^[2] The vast majority of Americans would be net losers from such a tax bill, if:

Sooner or later, the cost will need to be offset through some combination of spending cuts and tax increases.This analysis, following an approach that TPC used in its analysis of the potential ultimate effects of a prior Trump tax plan,^[4] captures the frequently overlooked reality of a plan that includes net tax cuts over the next decade: sooner or later, the cost will need to be offset through some combination of spending cuts and tax increases.  We conclude that the spending cuts and tax increases needed to offset the cost of the Trump/GOP tax cuts would cause most Americans’ incomes to fall more than they would gain from the tax cuts themselves.  (See Figure 1.)

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These findings underscore the importance of the debate over the budget resolution and the instructions provided for the tax plan.  Congress is far more likely to avoid effectively transferring income from low- and middle-income people to the rich if the resolution requires, at minimum, that tax legislation be revenue neutral; that is, all tax cuts should be fully offset by other tax increases, such as closing tax loopholes.^[5]  If the resolution instead facilitates tax cuts that can be paid for by adding to budget deficits that would result in damaging spending cuts down the road, or by cutting critical programs like Medicaid right away, then the tax cuts would likely leave low- and middle-income people worse off.^[6]  Reductions in investments and in basic assistance in nutrition, health, education, and other areas vital to the broad population would be made to pay for large tax cuts for the wealthy. 

The Majority of Americans Would Pay for a $1.5 Trillion Tax Cut Benefiting the Top

Senate Budget Committee Chairman Mike Enzi’s proposed budget resolution would allow lawmakers to use a legislative fast-track process known as reconciliation (which needs just a simple majority vote in the Senate) to pass a tax cut bill that would add $1.5 trillion to deficits.

For this analysis, we first assume that these $1.5 trillion in tax cuts would follow the basic structure of the tax plan that President Trump and Republican congressional leaders unveiled last week.  As such, we assume the eventual $1.5 trillion tax cut bill would deliver the same share of tax cuts to each income group as that plan.^[7]  TPC estimates that by 2027, when key components of that tax plan are in full effect:^[8]

• Eighty percent of the tax cuts would go to the top 1 percent of households (whose incomes exceed $900,000).
• Forty percent of the tax cuts would go to the top 0.1 percent (whose incomes exceed $5 million).
• The bottom 80 percent of Americans would get just 13 percent of the tax cuts.

Second, we acknowledge that the cost of the tax cut will need to be offset through some combination of spending cuts and tax increases, even if the costs are initially funded through increased deficits.^[9]  

To illustrate this, we assume that the costs of the additional offsets necessary to fully finance a $1.5 trillion tax cut plan are borne equally by each household in the country, as this TPC financing scenario is the one that most closely reflects the budget priorities of the Trump Administration and the Republican Congress.  President Trump and Republican lawmakers have repeatedly proposed substantial budget cuts in programs that help families meet basic needs like Medicaid and SNAP (food stamps), as well as in investments that can help build a stronger economy like education and research.  They have justified these cuts as necessary to address the projected growth in debt as a share of the economy that we already face — before accounting for a $1.5 trillion tax cut.    

Under this “equal costs per household” scenario, in 2027 (see Figure 1):^[10]

• The bottom fifth of the income spectrum would lose on average about $1,000 each, amounting to a 5 percent reduction in their after-tax incomes.
• The middle fifth of the income spectrum would lose on average about $800 each, amounting to a 1 percent reduction in their after-tax incomes.
• Every income group in the bottom 95 percent of the income spectrum would be net losers, on average, while only the top 5 percent would be net winners. 
• The top 1 percent would be big winners, gaining on average about $128,000 each, a 5 percent increase in their after-tax incomes.
• The top 0.1 percent would be the biggest winners of all, gaining on average about $600,000 each, a 6 percent increase in their after-tax incomes.

These estimates may understate the extent of the likely losses for low- and middle-income Americans under stated GOP tax and budget policies, for two reasons:

1. Noting the depth of the cuts to low- and moderate-income programs in the Administration’s and congressional Republican budget and health reform proposals, the authors of the similar TPC analysis that this paper draws on state: “A scenario more regressive [hitting low- and moderate-income Americans even harder] than equal-per-household financing would most accurately characterize the policy preferences embedded in recent proposals by the Trump Administration and Congressional Republicans….”
2. The Senate Budget resolution would allow Congress to use reconciliation to pass a bill that had more than $1.5 trillion in tax cuts through the Senate with only a simple majority vote — so long as the additional tax cuts were paid for with cuts to Medicare, Medicaid, and other programs under the Senate Finance Committee’s jurisdiction that help families afford basic needs.  This is because the budget resolution instructs the Finance Committee to make changes to deficits, not revenues.  This means that the Senate can use reconciliation to pass a bill that makes cuts in mandatory programs that help families afford basic needs, and every dollar cut from those programs could be used to cut an additional dollar in taxes (on top of the $1.5 trillion).

In its analysis, TPC also examined two other financing scenarios, both of which reflect far more progressive financing alternatives (relying more on financing that hits higher-income households) than are reflected in the spending cuts prioritized by the Trump and House Republican budgets.  These other scenarios show that only by financing the tax cuts with progressive tax increases is it possible for the majority of Americans not to be net losers.  Ultimately, a tax plan that meets the standards of revenue and distributional neutrality requires offsetting any tax cuts with tax increases, and that the cuts and increases are designed in a manner that leaves the current distribution of after-tax income unchanged.

Conclusion

This analysis (and the TPC analysis from which it is derived) is a reminder that “there is no free lunch.”  A tax proposal that is not fully paid for — like the $1.5 trillion tax cut that the proposed Senate budget plan would allow — should not be judged solely on what a standard distributional table might show about its effects, because such a table doesn’t consider the income reductions that will occur due to the combination of tax increases and spending cuts ultimately required to offset its costs.  A full accounting of such a plan that considers necessary offsets would likely show most households would lose more from the plan than they would gain.