November 30, 2017 Steve Wamhoff

Director of Federal Tax Policy

November 30, 2017

Yesterday ITEP released a report on the Senate tax plan that expands our previous study by delving deeper into the how each component of the plan would affect different income groups and different states. We examine what happens in 2019, the first year when all of the tax provisions are in effect, and 2027, the final year of the decade-long budget window used by Congress.

One of the findings is that every income group would face higher personal income taxes in years after 2025 (including 2027). The only change to personal income taxes for families and individuals still in effect in 2027 would be the less generous inflation adjustment based on the chained consumer price index (chained CPI). Chained CPI would gradually push taxpayers into higher income tax brackets and make the standard deduction, the Earned Income Tax Credit, and several other breaks less generous over time. This change would, on its own, increase taxes on all income groups in years after 2025 (including 2027).

For most people, the only way to “win” from the tax plan in 2027 would be to benefit from the cuts in the corporate income tax. But most middle-class people are skeptical that corporate tax cuts would ever help them — and rightly so. We follow the approach of the Joint Committee on Taxation, Congress’s official revenue-estimator, in estimating the effects of corporate tax changes. JCT assumes that corporate tax cuts benefit shareholders in the short-run but that a fourth of the benefits go to workers by the end of the decade in the form of higher wages. That’s an awfully optimistic assumption and may turn out to not really happen.

Here’s one thing that we did not have space in our new report to mention: The switch to chained CPI would cause some low-income people to face a tax hike starting in 2019, the second year the plan would be in effect. This would happen because the Earned Income Tax Credit (EITC) becomes slightly less generous in 2019 as the income limits and earnings thresholds used to calculate the credit would be adjusted at the slower inflation rate.

This would reduce the EITC in ways that would initially seem trivial, by around $25 for some people, but the impact would grow over time. This would especially affect some working people without children in the home who are only eligible for a very small EITC today (the maximum EITC is just over $500 for childless workers) and who would not benefit from the only feature of the Senate plan aimed at helping working families, the increased Child Tax Credit.

ITEP found that more than one-fifth of childless workers receiving the EITC would be worse off in 2019 under the Senate tax plan.

This is striking because House Speaker Paul Ryan once touted a proposal to encourage work and alleviate poverty by expanding the EITC for childless adults. Now he is pushing a tax plan that would cut it. Unfortunately, helping workers who are currently hit hardest by the federal tax code is another goal of “tax reform” that has been left behind in favor of massive breaks for profitable corporations.