Acton Institute Powerblog

3 Reasons income tax cuts (almost) always benefit the wealthy

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Death and taxes may be the only certainties in life, but there is a close third: income tax cuts mostly benefit high-income workers.

As Congress discusses tax reform, the debate about who will benefit from tax cuts is back in the news. And many people are concerned with how the changes will favor high income earners. Even President Trump has promised that the reforms won’t give wealthy Americans a massive tax cut.

The reality is that there is almost no way to cut income taxes without most of the benefits going to high-income workers. Here are three reasons why:

1. Americans with high incomes pay most of the taxes

The intended goal of reducing taxes on Americans can have a significant affect on whose taxes are being cut. For example, let’s say the goal is to cut income taxes to return a specific amount of money back to citizens—$500 billion—in the hopes of stimulating consumer spending.

If that is our goal, then we can’t cut the income taxes paid by the bottom 45 percent of American earners. Why? Because they already don’t pay any income taxes.

As Politico notes, the top 0.1 percent of earners are projected to pay more to the IRS than the bottom 80 percent combined. And for 2017, official government data shows the top 20 percent will pay 95 percent of all income taxes. The rich benefit from income tax cuts because they pay most of the income taxes.

2. Americans with lower incomes already have low tax rates

But what if instead of focusing on a dollar amount, we just cut income tax rates? Couldn’t we just cut the rates on the lower rungs of the income ladder? Not really, because they are already low.

The average federal tax rate for people whose earnings put them in the 21st to 80th percentile of incomes has fallen by 30 percent since 1979 to 13.8 percent. Rates on low-income people have declined even further, by 57 percent, to 3.3 percent. If we cut the lowest rate by 1 percent it might save a worker $100 a year.

“The fact that they don’t pay very much in taxes means that it’s very hard to provide them with a large tax cut,” says Adam Looney, a former deputy assistant Treasury secretary for tax analysis in the Obama administration.

3. Marginal tax cuts benefit everyone

Income taxes are based on marginal rates, the amount of tax paid on an additional dollar of income. Here’s an example of a marginal tax rate bracket.

10% for income $0 to $9,275

15% for income $9,275 to $37,650

25% for income $37,650 to $91,150

28% for income $91,150 to $190,150

33% for income $190,150 to $413,350

35% for income $413,350 to $415,050

39.6% for income $415,050+

Let’s say we want to lower the taxes for everyone making $90,000 or less, so we reduce the 25 percent bracket to 20 percent, the 15 to 10 percent and the 10 to 7. (For the sake of simplicity, we’ll assume there are no deductions, including no standard deduction.)

The effect would be that someone making $9,000 a year would pay $270 less in taxes, someone making $35,000 would pay $1,750 less, and someone earning $50,000 a year would pay $2,500 less.

But the person making $100,000 would also save about $20,390 because of the lower marginal rates. The worker making $9,000 saw her taxes reduced by 3 percent but the person making $100,000 had a more than 20 percent reduction.

“It’s basically impossible to have a large tax cut that doesn’t involve most of the benefits going to high-income groups just because that’s who pays taxes now,” says Looney.

The real questions Americans—especially American Christians—should be asking is, “Why does it matter?” Why are we so worried that the wealthy may be getting some sort of advantage that is out of proportion to what we may be getting? Perhaps we should be less concerned on sinful class envy and more focused on developing prudent tax policies that benefit everyone and lead to greater economic flourishing.

Joe Carter Joe Carter is a Senior Editor at the Acton Institute. Joe also serves as an editor at the The Gospel Coalition, a communications specialist for the Ethics and Religious Liberty Commission of the Southern Baptist Convention, and as an adjunct professor of journalism at Patrick Henry College. He is the editor of the NIV Lifehacks Bible and co-author of How to Argue like Jesus: Learning Persuasion from History's Greatest Communicator (Crossway).

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