Who Really Pays Under the Senate Tax Bill?

But as good as those analyses are, they are incomplete. That’s because the Senate bill does not only change tax policy, it also has a big effect on federal spending, and existing analyses don’t take those spending changes into account. They should, because the spending changes are almost as big and consequential as the tax changes.

First of all, the bill repeals the Affordable Care Act’s individual mandate, which has direct spending effects on several health programs, most notably Medicaid and Medicare. Second, under current law, passage of the Senate tax bill will trigger automatic spending cuts to certain parts of the federal budget, including Medicare, the Social Services Block Grant program, some infrastructure programs, the Crime Victims Fund, and many others.

Once we incorporate the effects of these massive changes in federal spending into the distributional estimates, the bill’s true impacts become much clearer. Low and moderate-income households bear an extremely heavy burden – and that burden gets larger over time – while only the very rich benefit at all.

For example, the bill’s defenders point to the 2019 distribution of the tax changes as evidence that their legislation delivers benefits to everyone. However, once we account for the changes in spending, the average effect for families making under $50,000 turns negative even in 2019 and the average benefit for a family making between $50,000 and $100,000 amounts to less than half a percent of their income.

The bill’s effects get worse for low and middle-income families over time. And that holds true even before the massive expirations that are built into the bill begin to kick in. Consider a household making between $40,000 and $50,000 a year. According to the Joint Committee on Taxation, in 2025 the average household in that income group can expect a tax cut of about $180 from the tax policy changes contained in the Senate’s bill. However, that same family bears the burden of over $660 in spending reductions, leaving them nearly $500 worse off. The average millionaire household, on the other hand, can expect a tax cut of over $35,000 with the spending cuts reducing their net benefit down to about $21,000. So, while the middle-class family is worse off, the millionaire comes away $20,000 richer.

After 2025, nearly all of the individual income tax provisions expire, except for one broad-based tax increase stemming from the indexing of the code to a slower measure of inflation. As a result, the average tax effect alone for every household making under $75,000 is a tax increase. Not surprisingly, when we add in the effects of the spending cuts, nearly everyone becomes a net loser. Only households making over $1 million a year are essentially held harmless, suffering a burden equal to less than 0.1 percent of their pre-tax income.

Of particular note is the degree to which the very poor bear the largest burdens, something only revealed once we take into account the spending side of the equation. Households making under $10,000 a year are largely left out of the tax side of the bill. The average change for a household in this group in 2019 is a tax cut of just $20. That becomes a very small tax increase by 2025. However, they are decidedly not left out of the effects from the spending cuts. By 2025, the average household making under $20,000 would suffer the burden of about $850 in cuts, which is equivalent to over 16 percent of their pre-tax income.

It may be hard to believe, but this distributional analysis probably represents a “best-case” scenario for low and moderate-income people, for three reasons. First, the programs affected by the automatic spending cuts are broad in their impact. Generally speaking, they help society as a whole, and therefore their direct benefits are spread out over everyone. Means-tested programs that are closer in their effect to transfer payments are largely exempt from the automatic cuts. If, however, the automatic cuts are replaced, either partially or fully, by cuts to Medicaid or to other means-tested programs, as the Senate budget resolution calls for, then the burdens of this bill will be far more focused on the bottom half of the income distribution than even the current impacts are.

Second, massive tax cuts skewed towards people at the top of the income spectrum are not only unlikely to spur economic growth and prosperity, but they are more likely to reduce growth and further concentrate wealth and income in the hands of a very few. These graphs do not account for the broad economic harm that will come from further incentivizing corporations to move operations offshore, to pay their top executives ever more while holding down wages, and to further rig the rules to keep their wealth from ever “trickling down.”

One final note. This analysis does not include the effects of higher health insurance premiums in the non-group market. The Congressional Budget Office reports that repealing the ACA’s mandate would not only lead to 13 million additional uninsured Americans, but it would also mean 10 percent higher annual premiums. A truly comprehensive distributional analysis would also include these higher costs to households, but unfortunately data limitations made their inclusion in this analysis impossible. However, according to the Census Current Population Survey, roughly 75 percent of households who purchase insurance directly (i.e. not through their employer and not through Medicare, Medicaid, or other public programs) make less than $100,000 a year. Therefore, we can be sure that a fully comprehensive distributional analysis that incorporated premium increases would further skew the burden of the Senate’s tax bill toward middle and low income families.

The tax implications of the Senate’s bill are already very clear. It facilitates an extremely large transfer of income from the bottom and the middle to the top. Once we incorporate the distributional effects of the attendant spending changes, however, the picture is much bleaker. The meager tax benefits afforded to some in the middle class in the early years of the bill are more than wiped out by the spending side losses. By 2027, everyone loses out, with the exception of the very rich.

Methodology

This more comprehensive distributional analysis combines four major elements:

1. The official Joint Committee on Taxation estimate of the tax provisions of the legislation in the Senate (except for the estate tax, which JCT excludes from its analysis).
2. An estimate of the benefits of the estate tax changes in the legislation based on the overall revenue effect from JCT and the distribution of who pays the estate tax from Tax Policy Center.
3. The official Congressional Budget Office estimate of the spending-side effects of the individual mandate repeal.
4. An estimate of the distributional consequences from the so-called “PayGo” sequester, based on the CBO methodology of distributing federal spending that is, “not linked to specific beneficiaries.” This method entails distributing half of the spending change to households based on share of total households, and distributing the other half based on share of total household income.