By Ben Casselman and Jim Tankersley
Middle-class Americans would fare better under the Senate tax bill than its House counterpart, according to a preliminary New York Times analysis. But both bills would disproportionately benefit high earners and corporations and raise taxes on millions of middle-class families.
The Senate Finance Committee bill unveiled on Thursday would, on average, cut taxes for people at every income level. But its benefits would vary widely within income brackets, depending on the specific circumstances of individuals and households, and many would pay more than under existing rules.
Republican lawmakers have been in a dash to devise — and pass — a tax overhaul that would mark their most significant achievement since taking control of Congress. President Trump and Republican leaders have outlined two main objectives for the rewrite: cutting taxes for American businesses and for the middle class. The legislation reduces tax rates on individuals and businesses, while eliminating some tax breaks to make up for lost revenues. It is meant to accelerate economic growth and increase wages for workers.
Both the House and Senate bills would cut the corporate tax rate to 20 percent from 35 percent and provide business tax benefits, such as the ability to immediately expense purchases of equipment.
But as written, the Senate bill would break a vow that the majority leader, Mitch McConnell of Kentucky, made on MSNBC last week when he declared that “nobody in the middle class is going to get a tax increase.” It would also break President Trump’s promise that rich people, such as him, would not benefit from a Republican tax plan.
On Friday, Mr. McConnell said he had misspoken in his MSNBC appearance. He said that every income group would see a tax cut on average, not that every individual would do so.
“You can’t guarantee that absolutely no one sees a tax increase,” Mr. McConnell said.
The Times analysis, using the open-source software TaxBrain, found that roughly one-quarter of families in the middle class would see their taxes increase in 2018, by about $1,000 on average. By 2026, the share seeing an increase would rise slightly, to about one-third, and the average increase would rise to about $1,600. For the majority of middle-class families that receive a tax cut, the average savings would be about $1,300 in 2018 and $1,700 in 2026.
The Times analysis defines the middle class broadly as those earning between two-thirds and twice the median household income, or about $50,000 to $160,000 per year for a family of three. To focus on families, the analysis excluded individual filers and households headed by people 65 or older and is adjusted for the size of each household.
Under the House bill, The Times has found, about half of middle-class families would pay more in taxes in 2026.
The analysis did not seek to calculate how workers might benefit from a steep cut in the corporate tax rate, which both the Senate and House bills would reduce to 20 percent from a top rate of 35 percent today, or project how the bills might increase economic growth and, with it, Americans’ wages.
For taxpayers earning more than $1 million a year, the Senate bill offers a more limited upside and downside than the House bill.
The Senate bill is less likely than the House bill to yield tax increases for high-income Americans, in part because it cuts the top marginal personal tax rate, while the House bill creates a so-called “bubble rate” that would actually raise taxes on many high-salaried workers.
The Senate measure would also produce a smaller average tax windfall for high earners than the House version, in part by offering less generous benefits for owners of businesses known as pass-throughs, which are not organized as corporations.
Under the Senate plan, “Americans are especially likely to face a tax increase if they have a smaller family, have mostly wage income instead of investment income, or claim some of the many deductions that the bill repeals, like those for state and local taxes and unreimbursed employee business expenses,” said Lily Batchelder, a professor and tax specialist at New York University Law School, who worked on economic policy in the Obama administration. “They are increasing taxes on many in the middle class, while concentrating their tax cuts on the wealthy.”
The Senate bill appears much better for the very wealthy than it is for the somewhat wealthy. About half of families earning between two and three times the median income — or about $160,000 to $240,000 for a family of three — would pay more in 2018 than under existing law. But among the richest families, those earning more than about $500,000 for a family of three, nearly 90 percent would get a tax cut.
The findings come with an important caveat: The Senate bill, as written, appears unable to muster the 60 votes needed to avoid a Democratic filibuster, meaning Republicans will need to amend it to comply with the budget reconciliation rules and allow permit passage by a simple majority. Those changes could likely include putting expiration dates on some of the bill’s major provisions, which could make the final version of the bill look less favorable to the middle class, particularly in later years.
The Times’s figures are based on an analysis of Census Bureau data using a tax model from the Open Source Policy Center, a Washington research organization affiliated with the right-leaning American Enterprise Institute. Because the analysis is based on publicly available data, not actual tax records, it may not capture all the intricacies of Americans’ household finances.
The Senate bill differs sharply from the House version in its approach to cutting taxes on businesses. But when it comes to taxes on individuals and families, the bills are more similar than different. Both would double the standard deduction while eliminating a raft of deductions and credits. Both would make the child tax credit more generous. Both would restructure federal income tax brackets to impose lower marginal tax rates at most income levels, although the Senate approach, unlike the House version, doesn’t eliminate two brackets entirely.
The Senate bill includes features that would make its plan more favorable to the middle class. It preserves some popular tax deductions and credits that the House bill initially would have eliminated, and it makes the child tax credit somewhat more generous and widely available. On the other hand, the Senate bill, unlike the House version, would eliminate the deduction for property taxes, which could lead to higher federal taxes for homeowners in areas with high property tax rates or expensive housing markets.
Aparna Mathur, an economist at the American Enterprise Institute, said senators could improve the bill with further changes, such as expanding the earned-income tax credit and extending the benefits of the child tax credit to more low-income taxpayers. “We clearly need to do more to help the lowest-income families,” she said. “At the same time, we can engage in more base broadening for the highest-income households, perhaps by eliminating and not just capping the mortgage-interest deduction.”
The Times analysis found that roughly one-fifth of the Senate bill’s cuts in 2018 would go to families and individuals earning $1 million or more, and close to half would go to people earning at least $200,000. Between 10 million and 15 million taxpayers earning less than $100,000 a year would pay more than under existing law.
Families earning more than $1 million a year would see their after-tax income rise by about 1.7 percent in 2018 compared with what they would make under current law, nearly triple the gains enjoyed by those earning less than $200,000.
Over all, the Senate bill would cut individual income taxes by about $30 billion in 2018, and by $900 billion over the next decade, according to Congress’s nonpartisan Joint Committee on Taxation. And most people in all income groups would see a tax cut, although the cuts would be modest for most lower earners.