The Tax Cut and Jobs Act will Worsen Inequality in Pennsylvania

President Trump signed the Tax Cut and Jobs Act into law on December 22, 2017. While spun by Republicans in Congress as a boon to middle class Americans, as a factual matter this tax cut is a not-so-veiled transfer of income into the hands of the already wealthy, which will worsen inequality in our state and across the country.

Let’s put this legislation in context. Over the last 25 years, incomes for the very richest Pennsylvanians has been rising fast while incomes for the majority of us have been stagnant. In fact, in Pennsylvania the top 1% has captured 44 cents of every dollar of income growth since 1979 (Keystone Research Center). Low-wage workers, even those who work full time, can’t make ends meet. Meanwhile Pennsylvania has not raised the minimum wage in 10 years and many low wage workers are forced to rely on government programs for health care and food stamps.  At this time of extreme inequality in our country and our state, the injustice of this federal tax legislation is shameful.Let me explain why.

First, this bill gives most of its tax cuts to the rich and corporations, while any benefits that the poor and middle class may see will be eliminated in short order. 

This tax bill goes into effect in 2018, but the majority of provisions impacting families and individuals would expire after 2025. The Institute on Taxation and Economic Policy (ITEP) estimates that in 2019:

  • The top 5% of income earners in Pennsylvania – those who earn more than $346,700 a year – will receive more than half of total tax cuts.
  • The richest 1% of Pennsylvanians – that is those making on average $1.86 million a year – will get a tax cut of about $54,000 ($53,580) on average – only a bit less than the median household income in Pennsylvania. This means the richest 1% would see a tax cut greater than the yearly incomes of nearly half of Pennsylvania’s households.
  • The poorest 20% of income earners in Pennsylvania, earning an average of $14,400 a year, would only see an average tax cut of about $110 a year. That works out to about $9 a month.

Over the next eight years, this picture would change, but not for the better. The benefits of the tax bill skew even more strongly to the very top because the provisions that impact families and individuals expire. Any tax cuts, however meager, the middle class and poor might see in the initial years would disappear by 2027.

In 2027, Pennsylvania’s 1% would still see an average tax cut of about $7,000 while the bottom 60% would see a tax increase of, on average, about $100.

While many provisions that benefit the middle class and poor will sunset, corporate tax cuts enacted in this legislation are permanent. This corporate tax cut is the largest one-time rate cut in U.S. history for our nation’s largest companies (35% to 21%).

There is another way this tax plan will accelerate inequality. This tax plan that primarily benefits high income Americans and corporations is phase one of a two-part strategy. It will result in a decrease of $1.5 trillion dollars in federal revenues. That reduction of federal revenues leads to part two of the strategy – an effort to pay for the tax cuts by slashing social programs. While we don’t yet know exactly how this will play out, we do know that Republicans, led by House Speaker Paul Ryan, have targeted the Affordable Care Act and social programs including Social Security, Medicare, Medicaid and food stamps. Taking into account future cuts to social programs, the negative long-term impact of this federal tax reform on middle- and low-income families is likely to be large.

President Trump and the White House have said that this legislation will lead to $4,000 raises for the average family. Yet, so far, only 2% of Americans have reported they’ve received bonuses or an increase in pay as a result of this tax plan’s windfall to corporations. By contrast, there are many reports of stock buybacks that drive up share prices and benefit owners and shareholders. While parents across Pennsylvania stay up late at night worrying about how to feed their kids and pay their rent, the leaders of this country have facilitated a huge transfer of income upwards to the already wealthy.

The unsupported narrative about bonuses and raises for American workers diverts the conversation from what we really need to do to improve jobs and raise wages. To truly create an economy that works for all of us, we need to invest in communities, not transfer more money to the wealthy and deplete our national funds. We need to raise the minimum wage to a livable wage, invest in human and other social services and aim to build up and support our communities and families. 

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