Tax Cuts for Whom?

That is the first part of the title of an economic working paper by Owen M. Zidar from the Booth School of Business at the University of Chicago published in 2015. Dr. Zidar looked at how job growth was effected over a two-year period by tax increases and decreases as a function of income level of the taxpayers. In brief, tax cuts for the wealthy don’t lead to job creation while tax cuts on the poor and middle class (who spend all or the vast majority of their income) lead to substantial job growth.

Now that we’re seven months into the republican tax cut, it seems like a good time to look at the benefits – specifically, who gets what.

Let’s ignore business taxes for this discussion. There is a worldwide race to lower business taxes in the hopes that companies will choose to relocate to this country or that country, but in the United States, a much higher percentage of federal income is received from individual income taxes than business taxes.

Last year’s republican tax reform lowered tax rates and increased the size of tax bracket to lower the income taxes paid by all. Income taxes are dependent on many things – number of dependents, income range and the various credits and deductions that come with it, married or single, etc.

For simplicity, our comparison will look at the same family at different income levels – a not very charitable married couple without dependent children living in an inexpensive house with the mortgage paid off (i.e., they will take the standard deduction).

  1. Cleaners – Combined pay = $1,000 every 2 weeks
  2. Office Workers – combined pay = $2,000 every 2 weeks
  3. Plumbers – combined pay = $4,000 every 2 weeks
  4. Doctors – combined pay = $8,000 every 2 weeks
  5. Lawyers – combined pay = $12,000 every 2 weeks
  6. Extra Special Salaried Staff (not business owners) – combined pay = $20,000 every 2 weeks
  7. Really Extra Special Salaried Staff – combined pay = $50,000 every 2 weeks

We’ll stop there although there are people who make much more than the $1.3 million per year of the seventh category.

How has the federal withholding tax changed for each category – or put another way, how much more is in your paycheck?

  1. $67 withholding in 2017 – $56 withholding in 2018 = $11 more in paycheck
  2. $214 (2017) – $172 (2018) = $42 more in paycheck
  3. $589 – $470 = $119 more in paycheck
  4. $1,642 – $1,374 = $268 more in paycheck
  5. $2,897 – $2,334 = $563 more in paycheck
  6. $5,682 – $4,974 = $708 more in paycheck
  7. $17,562 – $16,004 = $1,558 more in paycheck

The real median household income in 2016 was $59,039 which works out to $2,270 per paycheck if paid every two weeks. That means that the average American family has an additional $50 extra per pay period or $25 extra per week thanks to the Trump tax cut.

There are predictions that the United States will experience a trillion dollar budget deficit during these strong economic times because the tax cut is not likely to pay for itself. If the deficit is that large when things are good, how high will it be when the economy dips into a recession?

The republicans have historically been fiscally conservative and until last year’s debates over the tax bill, unwilling to make changes that add substantially to the nation’s deficit and debt. What changed? Why were republicans so willing to risk the country’s financial health for an average tax savings of $25 per week?

The answer may be found in looking at who benefited from the Great Recession that began in December 2007. The people hurt the most were those in the middle class who lost jobs and houses and watched their investments shrink by 50% as the market plummeted.

The people who fared the best were those with disposal income that could be used to buy investments on the cheap. The stock market has more than tripled since it’s low in March 2009 and the average home’s value has gone up 50% since it’s recession low. Meanwhile, home ownership rates have dropped significantly from their pre-recession highs (7.1% lower) while rents have continued their steady rise, largely unaffected by the recession and 30% higher than in 2008. Finally, higher federal debt means more investment opportunities, especially if the debt grows so much that higher interest rates will be needed to find buyers of treasury bills and bonds.

Republican lawmakers and the president appear to make financial decisions that will damage the U.S. economy over the long term. It is uncharacteristic behavior and quite frankly, confusing. That is until you factor in that those with the money will come out better after the next major recession. They will have more investments, they will collect more in rent and they will have more to give to the reelection campaigns of their favorite lawmakers.

About tonyj126

I'm a 50+ married man who always seems to have a large backlog of work to do, but also a lot of flexibility in my schedule. Much of the work I do is volunteer or taking care of extended family members. I suffer from, as my priest calls it, "the sin of self-sufficiency," which means I can figure out how to do most things myself, and consequently, reduce the need for community to solve problems. As a logical extention (at least to me), I find myself called to comtemplate the country's and the world's woes and offer my observations. I hope someone out there will find them useful.
This entry was posted in Economics, Trump Democrats Update, U.S. Politics, Uncategorized. Bookmark the permalink.

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