13.11.2019

The insane logic of cutting taxes on the highest earners in the United States

The US is moving swiftly toward a massive tax cut for the highest earners. But the question is, why?

Does it really make sense for Republicans to cut taxes on the highest earners, when they already pay historically low taxes and control a historically high share of national earnings?

The Republican tax bills have a lot of moving parts. Some of their shared ideas make sense: Economists of many stripes agree the US corporate tax rate needs to come down because it’s driving companies to keep—or shift—earnings overseas. A larger child tax credit will give working class families tax relief. Eliminating deductions on mortgage interest makes sense.

Most of the other proposals are baffling: That boost to child tax credit is phased out after five years. Instead of fixing the Alternate Minimum Tax so it does its job—ensuring high-earners pay a minimum tax—it eliminates it. It creates a complex system to lower the tax on pass-through income that will benefit small businesses, which will also chop taxes for investors and high-earning professionals. It eliminates all taxes on inheritance. And though it doesn’t lower the top marginal tax rate, it lifts the top bracket, so instead of paying 39.6% on all income over $480,050, the highest earners will pay that rate only on income over $1 million.

All this while raising taxes on millions of working- and middle-class families and adding more than $1.5 trillion to the national debt. The bills will not boost growth by even 1 percentage point annually, according to two different estimates from the University of Pennsylvania and the Tax Policy Center.

So, what are lawmakers doing? Look at that first chart again. Today, the top 10% of earners in the United States earn 47% of all income in the country. When the US amended the constitution to create a permanent income tax in 1913, the top 10% were earning 42% of all income.

It’s true that the enormous cost of World War I played a role in the rise of income taxes, but the US is also now engaged in its longest war ever, a comparably expensive one. World War 1 cost the US $32 billion, which is $563 billion in today’s money. This was just over 50% of GDP at the time, the equivalent to around $9 trillion in today’s economy. The cost of the wars fought under the umbrella of the post-9/11 Authorization for Use of Military Force is approaching $5 trillion (pdf)—Congress has cut taxes as the wars have gone on.

Let’s ask one last time: what is Congress up to?

This isn’t a growth bill. This isn’t a tax cut for the working class or even the middle class. It sure looks like a give-away.

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