Tax policy is all about trade-offs, and Republicans are about to see just how stark their choices are.
One version of the administration’s tax plan – lower rates and fewer deductions – would leave 19% of households with tax increases and still add $3.5 trillion to budget deficits over the next decade, according to a new analysis from the Tax Policy Center. Those potential tax increases are concentrated in the middle class and upper middle class.
The administration hasn’t offered a detailed enough plan for a full estimate, and officials’ ideas are changing as they negotiate with Congress. So the analysis released on Wednesday isn’t all that useful for ascribing specific numbers to a specific White House plan.
But what it does is show the big picture and some possible obstacles as lawmakers try to hit their target of a major tax-code overhaul by the end of the year.
The center started with the administration’s proposed tax cuts from April. Those include lowering the corporate income tax rate from 35% to 15%, eliminating the alternative minimum tax, ending the estate tax and doubling the standard deduction. The analysis then included revenue-raising provisions that were part of that April outline, like the repeal of the deduction for state and local taxes as well as ideas that were part of the campaign but left vague in April, such as repealing the personal exemption.
The result: While most households would get tax cuts, 19% would see their taxes go up. That’s true in the middle 20% of the income distribution, where nearly one-quarter of households would get a tax increase. And it’s true among people between the 90th and 95th percentiles, where more than 30% would get a tax increase under this approximation of the plan.
“It’s the fact that you’ve given such a big tax cut that makes it hard to balance things out,” said Roberton Williams, a senior fellow at the center. “What you have to do is not give as big tax cuts, because the tax increases, at least the ones they’ve talked about, just aren’t that big.”
Even though most households would benefit, it’s an axiom of tax policy that winners don’t always believe they’ll win and that losers will be loud. If that dynamic plays out this year, the politics could prove challenging for Republicans.
The groups on either end of the income spectrum look least likely to have a tax increase. Among the bottom 20% of households, just 6.8% of them would have a tax increase. And among the top 1% of households, 9.9% would see higher taxes.
And even after all that, this version of the plan would still add to budget deficits, which leading Republicans say they don’t want to do. That means more revenue-raising provisions – and more people who could see their tax burdens get heavier.
The Tax Policy Center is a joint project of the Urban Institute and the Brookings Institution; it is run by a former Obama administration official.
