Why Was the Trump Tax Plan a Massive Cut for the Rich and Minimal for Middle and Lower-Income Earners?
When the Trump Tax Cuts were initially introduced, the general assumption was that it would result in a standardized 3% across-the-board tax reduction for all income groups. However, the reality turned out to be quite different. After a detailed analysis, it became clear that the tax cuts were highly targeted, disproportionately benefiting the wealthy while providing very little relief to middle and lower-income earners. This article delves into why this was the case and how the tax brackets were structured to achieve such an outcome.
Unveiling the Discrepancies in the Trump Tax Cuts
The primary components of the Trump Tax Cuts, which were claimed to be a 3% across-the-board reduction, turned out to be a mere 20% of the total tax cut. The remaining 80% of the tax reduction was allocated to other provisions, many of which were more beneficial to higher-income earners.
For a couple earning $60,000 (fully middle-class) and a couple earning $120,000 (generally considered rich), the tax savings differed significantly. The $60,000 couple would see no tax savings, while the $120,000 couple would benefit more from the tax cuts. This discrepancy was due to how the tax brackets and reductions were structured.
How the Tax Brackets Were Structured
The Trump Tax Plan consisted of seven tax brackets, with the middle five brackets receiving a 3% reduction. The upper bracket, which was already taxed at a slightly lower rate, saw a smaller reduction. The lower bracket, which was taxed at a mere 10%, remained unchanged at 10% post-implementation, and continues to do so even today.
The tax brackets operate such that income up to a certain threshold is taxed at that bracket's rate, and any income over that threshold is taxed at the next higher rate. Therefore, the majority of the tax savings were realized by higher income brackets, as more of their income was subject to a lower tax rate.
Why This Structure Favoring the Wealthy?
The Republican explanation for maintaining the 10% bracket and not extending the full 3% reduction to everyone was stated in a few Republican statements: to prevent more people from ending up paying no taxes. They argued that it was important for the poor and middle class to have "some skin in the game." However, this reasoning was questioned as it seemed illogical. If making the poor and middle class pay taxes was so important, why not lower the tax rate for the lower brackets?
Much of the justification seemed to revolve around a perceived need for fairness, which seemed contradictory to other aspects of the American tax system. For instance, the US electoral college system is highly criticized for being fundamentally unfair. This further questioned the underlying logic behind the Republican stance on tax rates.
Conclusion and Reflections
The Trump Tax Plan's structure, while championed as a fair and across-the-board reduction in taxation, actually achieved significant discrepancies in the relief it provided. This was largely due to the strategic structuring of the tax brackets, which prioritized the wealthiest individuals. As a result, the argument that the plan was fair to all economic segments remains questionable.
If anyone can provide a logical explanation for why it is important for most Americans to have "skin in the game" when it comes to taxes, it would be an invaluable contribution to the ongoing debate on tax policy.