The United States faces a number of pressing economic challenges, perhaps the most fundamental being the subpar growth of incomes and opportunity for the middle class and the associated increase in inequality. Tax reform could have played a role in helping to address this challenge by strengthening economic growth, increasing the reward for work, and helping families working to get into the middle class. Instead, the tax bills passed by the House and the Senate would do the opposite — close off opportunity, raise taxes on tens of millions of households, and squander an opportunity to meaningfully and sustainably boost economic growth.
The direct effects of the House and Senate bills are not difficult to discern, it is just a matter of simple accounting — plug in your income and other tax data and see what the plan does to your taxes. For tens of millions of households the answer to this question is not pretty. Starting in 2023, the House and Senate bills, on net, raise individual income taxes on all income groups making between $10,000 and $40,000. By 2027, the individual income tax increases go up even further in the House bill and would apply to all households under the Senate bill. Overall, both bills would widen after-tax inequality by growing amounts over time. All this despite the fact that the bills would cut taxes by nearly $1.5 trillion over ten years.
Defenders of the bills often blow past these direct effects to instead argue that households will get a big pay increase because of the reduction in corporate tax rates. The problem, as every independent and nonpartisan estimate has found, is that well-designed tax reform can at best deliver a modest boost to economic growth. And this tax reform is not well designed — most notably because it would add to the debt, but also because it adds new complexities and uncertainty to the tax code going forward.
As a result, the highly respected and Republican-appointed Joint Committee on Taxation estimated that the House and Senate bills would add less than 0.1 percentage point to the annual growth rate over the next decade, similar to estimates from other models, including those utilized by economists at the conservative American Enterprise Institute and Moody’s Economy.com. Over the longer term, the additional debt and foreign borrowing associated with the bills would most likely reduce the size of the economy and, if anything, lower wages for the middle class.
Other ramifications of the tax bills are even more problematic. When the debt eventually needs to be settled it is likely that the middle class — and those working to get into it — would bear the brunt of the burden. Ending the individual responsibility requirement for health insurance would drive up premiums in the individual market by 10 percent and cause several million Americans to lose their health insurance. States and localities would engage in a race to the bottom to cut taxes on their highest-income households, draining critical funding from education and healthcare. And cuts to the estate tax would create further barriers to economic mobility.
The best outcome would be for Congress to start over on a plan that truly fulfills the stated goals of leaders of both parties, most importantly making sure the middle class benefits both from the tax cuts and from the stronger economy and broader opportunity they afford.