Trump tax cuts worsen income inequality
Nonpartisan Congressional Budget Office projects wealth shifting to very rich through 2021
Income inequality is worsening, and the middle class is bearing the brunt, according to a new study from the nonpartisan Congressional Budget Office. (Shutterstock)
By Ted Cox
You don’t hear the very rich complaining about the redistribution of wealth much anymore, perhaps because U.S. wealth is being redistributed to the very rich.
That’s the finding of a new study by the nonpartisan Congressional Budget Office. “Projected Changes in the Distribution of Household Income, 2016 to 2021” finds income inequality has worsened since 2016, in part due to the Republican tax cuts passed by Congress two years ago and signed into law by President Trump, and is projected to continue to get worse through next year.
In reporting on the study, released last week, CBS News pointed out that those 2017 tax cuts were sold to voters as “a major overhaul in the nation's tax laws billed by the White House as a boon for the middle class.”
The new CBO study suggests President Trump and Republicans in Congress sold the U.S. middle class a bill of goods in the 2017 tax cuts, which largely benefit the very rich. (One Illinois/Ted Cox)
In fact, however, just the opposite is the case, as CBS reported that “after accounting for taxes and government benefits, the middle fifth of households will see their income grow by 6.6 percent through 2021,” while according to the CBO forecast “that compares with a 17 percent gain projected for America's richest workers. In dollars and cents, the middle 20 percent of families will have seen their income grow a total of only $4,400, to $70,300, between 2016 and 2021, the agency estimated.”
Income for the top 1 percent is expected to rise on average nearly $200,000 over that same five-year period to nearly $1.4 million, while the bottom 20 percent could see their annual income grow a total of $1,700 to $36,700.
The study compares income before and after what’s termed “transfers and taxes,” with transfers being federal poverty aid such as Medicaid and food stamps (but not Medicare and Social Security), and taxes of course being federal income taxes. Before those transfers and taxes, the lowest one-fifth of income earners was projected to see income rise about 1.25 percent from 2016 to 2021, while the middle three-fifths — the vast middle class — see modest gains hovering at about 1 percent. The top one-fifth of income earners, however, see projected gains above 1.25 percent, escalating to a projected five-year income increase of about 2.3 percent for the top 1 percent.
After transfers and taxes, however, the projected rise in income rises directly from just under 1 percent in the bottom fifth to at least 1.5 percent for the top fifth, again escalating to an increase of more than 3 percent for the top 1 percent.
Again, it should be emphasized that those are percentage increases on incomes that are already much larger than what’s earned on average by the middle class, thus worsening income inequality.
The CBO study pointed out that all U.S. taxpayers were projected to see incomes rise over the five-year period through next year. “Average household income after transfers and taxes also increases over the period,” it added, “but that growth is more skewed toward higher-income households than growth in income before transfers and taxes.”
Similarly, all income groups were projected to enjoy some tax relief. The tax rate for the lowest one-fifth of income earners was projected to drop from 2 percent to 1 percent over those five years, and the tax rate for the middle three-fifths was projected to drop form 15 percent to 14 percent. But the top 1 percent of earners was projected to see its tax rate drop from 33 percent to 30 percent, and the 19 percent of top income earners after that were projected to see their tax rate drop from 24 percent to 22 percent — double the 1 percent drop in the tax rate enjoyed by the bottom four-fifths.
As a result, the Gini index measuring income inequality is expected to rise over the five years from 0.51 to 0.52 before transfers and taxes, from 0.47 to 0.48 after transfers and before taxes, and — double those increases — from 0.42 to 0.44 after transfers and taxes.
The Gini index measures income inequality on a scale from 0 to 1, with 0 being a totally equal society where everyone has the same, and 1 being a totally unequal society where are wealth is concentrated in one person. The U.S. Census Bureau reported in September that in 2018 the Gini index rose “significantly higher” from 0.482 the previous year to 0.485 — a record since the bureau began compiling the Gini index in 1967, when it stood at 0.397. At the same time, in 2018, no European nation had a Gini index higher than 0.38.
CBS News quoted Brookings senior fellow Richard Reeves and research analyst Christopher Pulliam as saying, "Significant improvements in the quality of life of the middle class are not likely to come from general economic growth, or at least not anytime soon.”
The study drew a pointed comparison between labor income and income generated by capital gains, such as stock sales. “In CBO’s projections, average labor income per household grows at an average annual rate of 1.3 percent between 2016 and 2021,” the study stated. “Capital gains, which are highly concentrated at the top of the distribution, are projected to grow faster than other types of income.
“CBO projects that capital gains will grow at an annual average rate of 6.3 percent per household,” it added. “That growth disproportionately increases income for households toward the top of the distribution in the agency’s projections.” Capital gains are also taxed at a lower rate than federal income taxes.
The study projects that the bottom four-fifths of U.S. taxpayers will see their share of overall U.S. income diminish, while only the top fifth sees its share increase. Again, that trend actually worsens after transfers and taxes, with the top 1 percent enjoying the bulk of the gains.