In a recent question I asked, a commenter just told me:

You should remove the "which largely cut taxes for the rich" because it is A) Not True. [...]

I try to always consider that I could be wrong when told so, and research to correct myself, but in the case of legislation it's often hard to figure out what's correct if you aren't particularly politically adept, which I'm certainly not. So while I thought from what I've read in the news that the recent tax bill passed by the senate is largely a tax cut for the rich, perhaps I'm wrong.

To clarify: I would define "largely cut taxes for the rich" as meaning the taxes of the top 1% were in some way shape or form lowered a lot more than the taxes of the middle class or their wealth was significantly increased via corporate tax code changes

So my question is:

Were the taxes of the top 1% in some way shape or form lowered a lot more than the taxes of the middle class in the recent tax bill?

Clarifications on how to define the difference:

  • based on percentages of income, not dollar for dollar.
  • based on individuals, not households, (if easier to calculate this way).
  • taking into account stock holders and how the corporate tax deductions will benefit individuals who own large amounts of stock (if applicable).

I realize, especially on that last point, that the answer required is non-trivial, but studies done by credible sources can be referenced to keep the answer at a doable size. While a big topic to consider, if we average citizens are expected to understand its outcomes / effects and vote accordingly, I would hope that it should be possible to summarize the answer to this question in the Stack Exchange format.

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    It's misleading because mathematically impossible to NOT cut the taxes for the reach and have a meaningful tax cut; because rich pay a lot more in taxes in the first place. – user4012 Dec 8 '17 at 3:55
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    @user4012 not if you go by percentages. – john doe Dec 8 '17 at 4:05
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    @user4012 It's quite possible, you could give a flat rebate for example, or only cut the bottom bracket, or establish deductions that favor the poor. – Teleka Dec 8 '17 at 4:40
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    @user4012, Re "meaningful tax cut": a tax cut needn't be affect the nation's total budget to be meaningful. Some taxes are unjust, for example American racists designed unjust poll taxes with grandfather clauses. Poll taxes were generally abolished by the 24th Ammendment, which ranks among the nation's most meaningful tax cuts ever. – agc Dec 8 '17 at 5:36
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    @Algid - "establish deductions that favor the poor" is not in any way, shape or form a "tax cut". People who don't pay taxes don't have any taxes to cut. Regardless of how desirable you consider that as a policy, you shouldn't make up incorrect terms to pretty the policy up. Tax cut is reducing amount of taxes paid by people who pay taxes. – user4012 Dec 8 '17 at 14:42

As mentioned by @Brythan, the Tax Policy Center analyzed the senate version of the bill. I want to highlight that report, because I think it is most relevant to your actual question.

The full report is available online as well.

Their analysis:

In general, higher income households receive larger average tax cuts as a percentage of after-tax income, with the largest cuts as a share of income going to taxpayers in the 95th to 99th percentiles of the income distribution. On average in 2027, taxes would rise modestly for the lowest-income group, change little for middleincome groups, and decrease for higher-income groups.

enter image description here

We can see that taxes will indeed be lowered more for the top 5% in the short-term, and more for the top 1% in the long term, although the percentage differences is not that large. In absolute numbers, the difference is of course more significant.

Note that this only analyses the senate version - not the final version - of the bill. It also excludes some provisions, including cuts regarding the individual mandate of the ACA.

The CBO anaylsis of the senate bill doesn't group income brackets by percentage but by absolute numbers. This analysis does take into account changes regarding the ACA. PBS created a graphic based on their analysis which shows that low-income groups will be negatively affected, while higher-income groups will see a small benefit:

enter image description here

The JTC also analysed the Senate version of the bill. It does not take into account changes to the ACA. Here is a graphic based on their analysis by the Washington Post:

enter image description here

Neither of these analysis take tax cuts into account which do not affect income, such as the estate tax, which primarily benefits the wealthy.

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    The answer above stated much of the cuts involved corporate tax. Wouldn't that translate into a significant wealth increase for the top 1% via stock value? If so, does this study take that into account? – john doe Dec 8 '17 at 16:57
  • Very informative, however when grouping income brackets, does (for example) the PBS graphic identify if the income is AGI or Taxable income? – BobE Dec 8 '17 at 17:00
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    How do they project taxes changing between 2021 and 2027? Does the law actually introduce new tax brackets and then schedule them to change at a later date? If not, then I would guess this is making some assumptions that aren't obvious. – user15103 Dec 10 '17 at 19:34

Using the definition from the question: the rich are those with the 1% highest incomes. I would prefer the .5% with the highest net worths, but this definition makes it easier to find data.

  1. The major point of the tax changes as written now is to reduce the corporate tax rate, not individual tax rates. Some would argue that that is a tax cut for the 1% as they own (on average) more corporate stock than the 99% as individuals. However, the 99% own more corporate stock as an aggregate. The top 1% only own 38% of all stock.

  2. There is a group of individuals who get what is called pass through income from businesses. Pass through income can come from a sole proprietorship, a partnership, an S-corp, or some Limited Liability Corporations (LLCs, which can be pass through or not).

    On one side, around 96% of those who get pass through income are not in the top 1%. However, those in the top 1% get around 70% of the pass through income. So this is something of a mixed bag. Most of the people who benefit from the reductions are middle class, but most of the benefits will inevitably go to those with higher incomes.

  3. Ending the Alternative Minimum Tax (AMT) will mostly affect middle class people. The majority of those paying the AMT are in the 99%. Four million or so will pay AMT, but the top 1% can only be 1.4 million by definition. It's also worth noting that the more one makes, the less likely the AMT is an issue.

    Beyond those paying the AMT, remember that another five or six million have to calculate the AMT to be sure that they shouldn't be paying it. So eliminating the AMT makes taxes easier for a large group of people.

  4. The individual income tax changes are something of a mix. There are a number of tax breaks that help the 1% more than the 99%. For example, deductions for State and Local Taxes (SALT), mortgage interest, and even dependents.

    Dependent exemptions favor the 1% because they pay a higher rate. 39.6% rather than 0%, 10%, or 15%. So the same $4000 exemption gives a 10% payer a $400 break while the rich person gets more than $1500. The reform changes this to a tax credit, which gives everyone the same benefit.

    SALT and mortgage interest favor the 1% because they only count for people who itemize their deductions and because the 1% pay more in SALT and have bigger houses. Limiting those to just a property tax deduction and interest on the first $500,000 of a mortgage favors the 99%.

Note that even using the most liberal definitions, the Tax Policy Center found similar increases in after-tax income for both the top 1% and everyone (including the top 1% as well as everyone else). Both came out under 2%.

It's worth noting that almost half (45%) of everyone pays no net income taxes. As such, many people can't have their income tax reduced without paying them money. To reduce taxes to that group, we'd have to make changes to the Social Security and Medicare taxes. I.e. the taxes that they actually pay.

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    This answer would be improved if it addressed the effects of the bill's modifications to the Estate Tax. – agc Dec 8 '17 at 5:44
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    Credit to Brythan in highlighting that one of the problems in trying to answer this question is that there are many different classes of income, individuals, households (is the one or two workers?), passthroughs that come in any number of flavors, corporate, partnerships (how many workers is that?), LLCs, etc. Trying to lump all these entities together to form a general conclusion about tax rate comparisons is task that even the CBO and the JCOT can't get agreement on. It would be more appropriate to focus the question on say - individuals or housholds. – BobE Dec 8 '17 at 6:00
  • @BobE Then I'll clarify here and in my question: Individuals. – john doe Dec 8 '17 at 6:14
  • Clarifications on how to define the difference: 1) based on percentages of income, not dollar for dollar. 2) based on individuals, not households. 3) taking into account stock holders and how the corporate tax deductions will benefit individuals who own large amounts of stock. – john doe Dec 8 '17 at 6:27
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    I don't see how the fact about stock owning is relevant. If you give 1 person 1000 bucks, and 1000 people each 1 buck, they got the same as an aggregate. But each individually only got 1/1000th. The 1 person clearly benefited more. Why would you treat non-rich people as an aggregate? I don't see the logic in that. – tim Dec 8 '17 at 9:34

As I understand @John Doe question, the focus is on individuals (versus households or any kind of Taxable entity), consequently I examined the simplest entity - the single filer taking only a standard deduction. As I understand it approximately 91% of individual persons earn 102,000 per year or less. So for the following comparison I limited 2018 AGI to 150,000. On a percent change basis: Graph of percentage reduction versus AGI

Take note that the Y axis are negative values

While John did not ask for a dollar basis... :

Graph of tax due vs AGI under current versus proposed law

My conclusion is with the class of persons filing a tax return as a single and claiming nothing other than the standard deduction, the House proposed tax bill significantly reduces the tax burden on the class of taxpayers whose AGI is less than 100,000.

Examination of the Senate bill reflects these same conclusions.

  • It is also interesting to note that, for the single filer (standard deduction only) the Senate bill is somewhat more favorable (from reduction in tax due) up to 189,300 AGI , after which the House bill is more favorable. – BobE Dec 10 '17 at 19:36

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