GOP Tax Plan Raises After-Tax Incomes for Lower, Middle Class

Incomes may increase by 1.4 percent in a year, 4.5 percent in the long run

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• November 8, 2017 2:25 pm


The Tax Cuts and Jobs Act would help lower and middle-class families see their after-tax incomes increase, according to an analysis from the Tax Foundation.

For those households in the second-lowest quintile, after-tax incomes are expected to grow by 1.4 percent as soon as next year. Those in the middle quintile could see after-tax incomes grow by 2.2 percent.

The legislation doubles the standard deduction for families, increasing it from $6,350 to $12,000 for individuals and from $12,700 to $24,000 for couples. The foundation says this component of tax reform gives the middle class a large tax cut. In addition, the bill creates a new $300 tax credit for each parent and a $300 credit for a nonchild dependent, which, according to the Tax Foundation, puts more income in lower tax brackets.

The Tax Foundation modeled the proposal and found that it would lead to an increase in GDP growth by 3.9 percent, an increase in wages of 3.1 percent, and the creation of 975,000 full-time jobs in the long term.

"Those dynamic effects should increase after-tax income by 4.5 percent for those in the second-lowest quintile, and by 4.6 percent for those in the middle quintile," the report explains.

After a decade, after-tax income is projected to decline since some of the provisions of the tax proposal would phase out, including the $300 family credit and some provisions on the business side.

"Our analysis demonstrates significant growth in static after-tax income during the years when all provisions are in effect, and substantial dynamic increases in later years even should Congress allow certain provisions to expire," the report explains. "If some of those provisions were extended, the benefit may prove even larger."

Scott Hodge, president of the Tax Foundation, said on Fox News that the GOP tax plan gives tax relief to those in the middle class while top earners may see higher tax rates than what has been proposed.

House Republicans say that the rate for top earners is 39.6 percent, but Hodge says it may be closer to about 44 percent, and it will have the added Obamacare surtax as well.

"We're looking at tax rates of the mid 40s for those people who earn more than say $1 million to $2 million."

"On the one hand on the individual side of the ledger they made some huge tradeoffs, giving a lot of tax relief to the middle class, sacrificing lower and top marginal tax rates that cost them economic growth," Hodge said. "So they get no economic growth from the individual side of the ledger, they do get a lot of economic growth from the business or corporate side of the tax code by lowering that top rate for corporations."

"We estimate that that alone will lift the size of the economy by about 3 percent over the next decade so that is great news," he said. "On that point no country on earth has ever dropped the corporate rate so far so fast as is proposed in this plan [and] that's really good news."

Published under: Tax Reform, Taxes