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Low- And Middle-Income Earners Stand To Gain From President Trump’s Tax Cut Plan

- October 30, 2017

President Trump's Tax Relief Proposals Will Benefit Low- And Middle-Income Earners In A Big-League Way

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TOP TAKEAWAYS

· President Trump's tax relief framework contains a number of provisions that will help middle- and low-income Americans keep more of their earnings.

· Cuts to the business tax rate proposed by President Trump will increase the average household's wages and earnings by at least $4,000, or 2.8 percent.

· President Trump's proposed increase of the standard deduction could "potentially pu[t] thousands of dollars each year into the pockets of tens of millions of Americans" and even eliminate the tax burden entirely for some low-income Americans.

· President Trump's tax relief plan would also significantly increase and expand the scope of the child tax credit, which rewards work and has lifted millions of low-income Americans out of poverty.

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PRESIDENT TRUMP'S TAX RELIEF PROPOSAL WOULD CUT THE U.S. CORPORATE TAX RATE-CURRENTLY AMONG THE HIGHEST IN THE WORLD

A Cornerstone Of President Trump's Tax Framework Is The Reduction Of The Current Corporate Tax Rate Which Depresses Wages

The Statutory U.S. Corporate Tax Rate For Most Major Companies Is 34 To 35 Percent . "34 percent of so much of the taxable income as exceeds $75,000 but does not exceed $10,000,000, and (D) 35 percent of so much of the taxable income as exceeds $10,000,000." (26 U.S.C. § 11)

The U.S. Has The Highest Statutory Corporate Income Tax Rate Among G20 Countries As Of 2017. ("International Comparisons Of Corporate Income Tax Rates," Congressional Budget Office , 3/01/17, p. 2)

President Trump's Tax Framework Reduces The Tax Corporate Tax Rate To 20 Percent. "The framework reduces the corporate tax rate to 20% - which is below the 22.5% average of the industrialized world. In addition, it aims to eliminate the corporate AMT, as recommended by the non-partisan JCT. The committees also may consider methods to reduce the double taxation of corporate earnings." ("Unified Framework For Fixing Our Broken Tax Code," Ways And Means , 9/27/17)

The United States' High Corporate Tax Burden Harms Economic Growth, Investment, And Wages Of U.S. Workers. "Finally, the repatriation tax policy would contribute to reducing the corporate tax burden at a time when the high U.S. rate harms economic growth, the amount and quality of U.S. investment, and the wages of U.S. workers." (Douglas Holtz-Eakin, Op-Ed, "The Need for Pro-Growth Corporate Tax Reform," United States Chamber Of Commerce , 8/11)

A National Bureau Of Economic Research Study Found That A High Corporate Income Tax Has The Effect Of Depressing Union Wages. "High corporate income taxes reduce the after-tax profits of firms earning rents, which are the same firms that are in positions to pay above-market wages to their employees. Since high taxes mean that there is less for everyone, it can hardly be surprising that high taxes ultimately depress union wages, particularly in capital-intensive industries where corporate taxes have the most impact on a firm's bottom line." (R. Alison Felix and James R. Hines Jr., "Corporate Taxes And Union Wages In The United States," National Bureau Of Economic Research , 8/09)

  • It Is "Reasonable" To Expect That The Same Effect Would Also Appear In Non-Union Wages. "But to the extent that there is a rent-sharing aspect of wages in settings without labor unions, it may be reasonable to expect that the same dynamics would appear, in that higher taxes would be associated with reduced wages." (R. Alison Felix and James R. Hines Jr., "Corporate Taxes And Union Wages In The United States," National Bureau Of Economic Research , 8/09)

Middle- And Lower-Income Workers, Not Corporate Shareholders, Currently Bear The Brunt Of The Corporate Tax Burden

For Years, Most Economists Believed That Shareholders Bore The Largest Burden Of Corporate Tax Rates, But In Recent Decades Research On The Impact Of Capital Mobility In A Global Economy Has Reversed This View. "Corporations essentially collect taxes that are ultimately paid by someone else: a combination of workers in lower wages, customers in higher prices, or shareholders in lower after-tax returns. For many years the dominant belief was that shareholders bore the biggest burden, but this has changed in recent decades with new research on the impact of capital mobility in a global economy. While labor is relatively immobile, especially across national borders, capital can go wherever it wants with relative ease." (Editorial, "The Wages Of Corporate Taxes," The Wall Street Journal , 10/23/17)

Domestic Workers Bear The Burden Of A High Corporate Tax Rate Because Wages Fall When Capital Is Relocated Abroad And Workers Cannot Move To Take Advantage Of Higher Foreign Wages. "The tax is likely to be even less efficient because it can distort both the domestic and the international allocations of capital. Domestic workers are more likely to bear a burden because workers cannot move readily between countries. Domestic wages will fall when capital is reallocated abroad and domestic workers cannot move to take advantage of a higher foreign wage rate." (William C. Randolph, "International Burdens Of The Corporate Income Tax," Congressional Budget Office , 8/06)

Domestic Labor Bears 70 Percent Of The Corporate Income Tax Burden, While The Domestic Owners Of Capital Bear Slightly More Than 30 Percent Of The Burden. "Burdens are measured in a numerical example by substituting factor shares and output shares that are reasonable for the U.S. economy. Given those values, domestic labor bears slightly more than 70 percent of the burden of the corporate income tax. The domestic owners of capital bear slightly more than 30 percent of the burden." (William C. Randolph, "International Burdens Of The Corporate Income Tax," Congressional Budget Office , 8/06)

President Trump's Corporate Tax Cuts Will Translate Into Higher Wages And An Increased Standard Of Living, Particularly For Lower-Income Families

Reducing The Federal Corporate Tax Rate From 35 To 20 Percent Would Increase The Average Household Income $4,000 According To One Conservative Estimate. "Reducing the statutory federal corporate tax rate from 35 to 20 percent would, the analysis below suggests, increase average household income in the United States by, very conservatively, $4,000 annually. The increases recur each year, and the estimated total value of corporate tax reform for the average U.S. household is therefore substantially higher than $4,000. Moreover, the broad range of results in the literature suggest that over a decade, this effect could be much larger." ("Corporate Tax Reform And Wages: Theory And Evidence" The Council Of Economic Advisors , 10/17)

Reducing The Corporate Tax Rate To 20 Percent Would Increase Wages By 2.8 Percent And Could Lead To The Creation Of Over 600,000 Jobs. "If lawmakers were to cut the 35 percent U.S. corporate rate to the OECD average, it would raise the overall wage rate by 1.9 percent over the long-term and create 425,000 full-time equivalent jobs. By contrast, adopting the UK rate of 20 percent would lift wages by 2.8 percent over the long-term and create more than 600,000 jobs." (Scott A. Hodge, "The Economic Effects Of Adopting The Corporate Tax Rates Of The OECD, The UK, And Canada," Tax Foundation , 8/15)

Cutting The Corporate Tax Rate Improves The Standard Of Living For All Families, But There Is A More Significant Effect At Lower Income Levels. (Scott A. Hodge, "The Economic Effects Of Adopting The Corporate Tax Rates Of The OECD, The UK, And Canada," Tax Foundation , 8/15)

Cutting The Corporate Tax Rate Raises The Wages Of Both Low And High Skill Workers. "Although the wage effects for workers may theoretically differ across the skill distribution, recent research finds that corporate tax reductions serve to raise wages of both low- and high-skilled workers (Felix, 2007). Thus, reductions in the corporate tax rate may offer a potent solution to the tepid wage growth experienced by U.S. workers over the past several years." ("Corporate Tax Reform And Wages: Theory And Evidence" The Council Of Economic Advisors , 10/17)

Since 2013, Wage Growth Has Been "Far Greater" In The 10 Developed Contrived With The Lowest Corporate Tax Rates Compared To Those With The Highest. "Wage growth has been far greater since 2013 in the 10 developed countries with the lowest statutory tax rate compared with those with the highest." (Editorial, "The Wages Of Corporate Taxes," The Wall Street Journal , 10/23/17)

PRESIDENT TRUMP'S PROPOSED CHANGES TO THE STANDARD DEDUCTION AND CHILD TAX CREDIT WOULD ALSO BENEFIT LOW AND MIDDLE-CLASS AMERICANS

Increasing The Standard Deduction Would Benefit Low- And Moderate-Income Families

President Trump's Expansion Of The Standard Deduction Means That No Married Couple Earning Less Than $24,000 Or Single Filer Earning Less Than $12,000 Will Pay Any Federal Income Tax. "In combination, these changes simplify tax filing and effectively create a larger 'zero tax bracket' by eliminating taxes on the first $24,000 of income earned by a married couple and $12,000 earned by a single individual." ("Unified Framework For Fixing Our Broken Tax Code," Committee On Ways And Means , 9/27/17)

The Standard Deduction Would Double And "As A Result, Many More Low To Moderate Income Families Would Pay No Taxes." "The standard deduction, currently $6,350 for single people and $12,700 for married couples, would double. As a result, many more low to moderate income families would pay no taxes" (Paul Davidson, "How Trump's Tax Plan Would Affect Households," USA Today , 4/26/17)

President Trump's Proposed Increase Of The Standard Deduction Could "Potentially Pu[t] Thousands Of Dollars Each Year Into The Pockets Of Tens Of Millions Of Americans." "President Trump on Wednesday plans to call for a significant increase in the standard deduction people can claim on their tax returns, potentially putting thousands of dollars each year into the pockets of tens of millions of Americans, according to two people briefed on the plan." (Damian Paletta and Steven Mufson, "Trump To Propose Large Increase In Deductions Americans Can Claim On Their Taxes," The Washington Post , 4/25/17)

The 70 Percent Of Americans Who Currently Take The Standard Deduction, Mostly Low And Moderate Income Taxpayers, Would Stand To Benefit. "About 70% of Americans, mostly low- to moderate-income, currently take the standard deduction and would benefit, Viard says. Many of the remaining 30% who itemize, largely higher income households, would likely switch to the standard deduction, leaving only about 5% itemizing, he says. Some wealthier Americans could end up paying higher taxes, though most would save." (Paul Davidson, "How Trump's Tax Plan Would Affect Households," USA Today , 4/26/17)

A Key Part Of President Trump's Tax Relief Package Is Expanding The Child Tax Credit Benefiting Low- And Middle-Income Families

Currently, An Individual May Receive Up To $1,000 For Each Qualifying Child Under The Child Tax Credit. "With the Child Tax Credit, you may be able to reduce your federal income tax by up to $1,000 for each qualifying child under the age of 17." ("Ten Facts about the Child Tax Credit," Internal Revenue Service , 2/10/11)

  • The Credit Begins To Phase Out At $75,000 For Individual Taxpayers And $110,000 For Married Taxpayers Filing Jointly. "The amount at which this phase-out begins varies depending on your filing status. For married taxpayers filing a joint return, the phase-out begins at $110,000. For married taxpayers filing a separate return, it begins at $55,000. For all other taxpayers, the phase-out begins at $75,000. In addition, the Child Tax Credit is generally limited by the amount of the income tax you owe as well as any alternative minimum tax you owe." ("Ten Facts about the Child Tax Credit," Internal Revenue Service , 2/10/11)

President Trump's Tax Framework Will Significantly Increase The Child Tax Credit, And The First $1,000 Will Be Refundable. "To further simplify tax filing and provide tax relief for middle-income families, the framework repeals the personal exemptions for dependents and significantly increases the Child Tax Credit. The first $1,000 of the credit will be refundable as under current law." ("Unified Framework For Fixing Our Broken Tax Code," Committee On Ways And Means , 9/27/17)

  • Additionally, The Credit Will Begin To Phase Out At Income Levels Higher Than The Previous Code, Ensuring More Middle-Income Families Benefit From The Credit. "In addition, the framework will increase the income levels at which the Child Tax Credit begins to phase out. The modified income limits will make the credit available to more middle-income families and eliminate the marriage penalty in the existing credit." ("Unified Framework For Fixing Our Broken Tax Code," Committee On Ways And Means , 9/27/17)

A Child Tax Credit Is Available To Only Working Families And Phases In As Earnings Increase. "The CTC is newer and has not been studied to the same extent, but it shares key design features with the EITC: it is available only to working families and phases in as earnings increase." (Chuck Marr, Chye-Ching Huang, Arloc Sherman, and Brandon Debot, "EITC And Child Tax Credit Promote Work, Reduce Poverty, And Support Children's Development, Research Finds," Center On Budget And Policy Priorities , 10/1/15)

Refundable Credits Like The Child Tax Credit Are Popular And Enjoy Bipartisan Support Because They "Reward Work And Alleviate Poverty." "Refundable tax credits like the CTC and EITC have enjoyed bipartisan support in the past because they reward work and alleviate poverty. People only get the money back on their taxes if they have a job and earned some money that year." (Heather Long, "The Simple Way To Tell Whether Trump's Tax Plan Is For The 'Little Guy' Or The 1 Percent," The Washington Post , 9/19/17)

The Child Tax Credit Combined With Other Refundable Credits Lifted 8.2 Million Americans Out Of Poverty In 2016 According To The U.S. Census Bureau Report On Poverty. "The CTC and EITC have also done exactly what they were intended to do: lift millions of people out of poverty. The latest report on poverty in America from the U.S. Census Bureau came out last week. It showed that refundable tax credits lifted 8.2 million Americans out of poverty in 2016, making the credits the second-best poverty reduction program in the United States after only Social Security." (Heather Long, "The Simple Way To Tell Whether Trump's Tax Plan Is For The 'Little Guy' Or The 1 Percent," The Washington Post , 9/19/17)

The Earned Income Tax Credit And The Child Tax Credit Combined Lifted 9.8 Million Americans Out Of Poverty In 2015. "The Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) together lifted 9.8 million Americans out of poverty last year and made 22.0 million others less poor, CBPP analysis of new Census data shows. The data allow us to measure of the impact of the entire credits - including both the refundable and non-refundable pieces of the CTC, in addition to the EITC." (Emily Horton, "EITC, CTC Together Lifted 9.8 Million Out Of Poverty In 2015," Center On Budget And Policy Priorities , 10/19/16)

Research From The Center On Budget And Policy Priorities Suggests The Child Tax Credit Leads To Improved Educational Outcomes For Young Children In Low-Income Households. "Moreover, research suggests that income from the EITC and CTC leads to improved educational outcomes for young children in low-income households. For each $1,000 increase in annual income over two to five years, children's school performance improves on a variety of measures, including academic test scores. A credit that's worth about $3,000 (in 2005 dollars) during a child's early years may boost his or her achievement by the equivalent of about two extra months of schooling." (Chuck Marr, Chye-Ching Huang, Arloc Sherman, and Brandon Debot, "EITC And Child Tax Credit Promote Work, Reduce Poverty, And Support Children's Development, Research Finds," Center On Budget And Policy Priorities , 10/1/15)

  • Children Whose Families Receive More Money From Refundable Tax Credits Do Better In School, Are More Likely To Attend College, And Earn More As Adults. "The credits' success in boosting work effort and earnings extends into the next generation, the new research indicates. Children whose families receive more income from refundable tax credits do better in school, are likelier to attend college, and likely earn more as adults." (Chuck Marr, Chye-Ching Huang, Arloc Sherman, and Brandon Debot, "EITC And Child Tax Credit Promote Work, Reduce Poverty, And Support Children's Development, Research Finds," Center On Budget And Policy Priorities , 10/1/15)

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