Greetings! Someone has referred you to this post because you’ve said something quite wrong about the Tax Cuts and Jobs Act (TCJA).
We apologize if this comes across as rude and impersonal, but we’re copying a bit started by Ken White (popularly known as Popehat) and subsequently adopted by Mike Masnick of Techdirt. Even more than three years later, the TCJA still generates so much outrage in certain circles that outright falsehoods are allowed to persist unchallenged. So we here at NTUF decided to riff off White and Masnick’s idea for how to address it.
We’d also like to make clear that the purpose of this post is not to demean or laugh at you for being wrong. If you spend any time at all on Twitter, it’s actually impressive if you manage to be right about the TCJA. There’s a self-sustaining cycle of misinformation about the TCJA out in the political arena — people opposed to the law distort or misrepresent what it actually did, which causes other people to become angry at the TCJA, who then in turn pass on the distortions they heard earlier, and so on.
Odds are, the wrong things you believe about the TCJA were told to you by someone else. You’re probably many levels down this game of factual “telephone,” and you’re saying things you fully believe. If that’s the case, then this is meant as a resource for you, an opportunity to correct yourself before you take your wrongness and make others be wrong with you. No one wants that.
If, on the other hand, you’re someone who’s intentionally misrepresenting the facts to others… well, we can’t help with that.
With all that being said, here are some of the reasons why someone may have felt the need to refer you to this post.
Jump to link:
- If you said something like “most regular Americans didn’t receive a tax cut from the TCJA”
- If you said something like “the TCJA benefited the wealthy at the expense of middle-class Americans”
- If you said something like “the individual tax cuts are just a bait and switch, because the income tax cuts expire in 2025”
- If you said something like “corporate income tax provisions of the TCJA don’t benefit average Americans”
- If you said something like “corporations did nothing productive with their savings from tax reform, they just engaged in stock buybacks”
- If you said something like “the TCJA was a massive increase to the national debt”
- If you said something like “the TCJA caused people to lose their tax refunds”
- If you said something like “tax reform hurt blue state taxpayers because it capped the SALT deduction”
If you said something like “most regular Americans didn’t receive a tax cut from the TCJA”
You’re wrong. You’re certainly not the only one who’s wrong about this — after all, just 17 percent of Americans believe that they received a tax cut under the TCJA. But still very wrong.
All told, about 80 percent of Americans received a tax cut under the TCJA, with an average tax savings of over $2,100. Only about 5 percent of Americans received a tax increase as a result of the law.
It’s true that just a little over half of the lowest quintile of income earners received a tax cut, but that’s because a lot of Americans in that income group don’t owe federal income taxes. After all, just 1.2 percent of lowest-quintile Americans saw a tax hike. Each of the other four quintiles all had 85 percent or more of its members receive a tax cut.
If you said something like “the TCJA benefited the wealthy at the expense of middle-class Americans”
You’re dead wrong, and you’ve hit on the irony of one of the main objections to the TCJA — the tax code was already so progressive that any tax cut appears to overwhelmingly benefit the wealthy. But (and hold onto your hats for this one): the TCJA made the tax code more progressive, not less.
It’s true. Now that data from the 2018 tax year has been released, we can clearly see what we knew to be the case before: had tax reform simply reduced every American’s tax liability by a flat percentage, say one or two percent, it wouldn’t have been as progressive as the TCJA was.
As a result of the TCJA, the share of the federal income tax burden paid by the top 10 percent of income earners rose from 70.1 percent pre-TCJA to 71.3 percent post-TCJA. It’s also not because they earned more income — this same income group’s share of total adjusted gross income (AGI) actually dipped slightly from 47.74 percent to 47.66 percent.
Meanwhile, the bottom 50 percent of income earners’ share of total AGI increased from 11.25 percent pre-TCJA to 11.61 percent post-TCJA. At the same time, that group’s share of federal income taxes dropped from 3.11 percent to 2.94 percent.
None of this is to say that the TCJA represented any kind of sweeping redistribution of wealth. But to say that the TCJA made the tax code more favorable to the wealthy and less favorable to lower-income Americans is flat-out wrong.
If you said something like “the individual tax cuts are just a bait and switch, because the income tax cuts expire in 2025”
Not only are you wrong, but you’re blaming the wrong faction of Congress for the part you got right.
Now, you’re not entirely wrong. If you’d just said that the individual income tax cuts, the doubling of the standard deduction, the expansion of the Child Tax Credit, and the higher Alternative Minimum Tax exemption are set to expire in 2025, you would be correct.
Undoubtedly, therefore, you were referred to this page because you implied that the Republican authors of the TCJA intended for these provisions to expire in 2025. In order to comply with budget reconciliation rules about impact on the deficit, Congressional Republicans chose to make some of the less controversial provisions temporary, expiring in 2025. The hope was that Republicans and Democrats could at least get behind making sure that the vast majority of Americans who saw a tax cut from the TCJA (see above!) don’t have their taxes raised in 2025.
After all, Republicans have done their part to extend these tax cuts. House Ways and Means ranking member Kevin Brady (R-TX), one of the main authors of the TCJA, recently introduced H.R. 11, the Commitment to American GROWTH Act, which would have made all the above provisions permanent. In the Democratic-controlled House, it has not advanced beyond the Ways and Means committee.
If you said something like “corporate income tax provisions of the TCJA don’t benefit average Americans”
You’re wrong, but you have strength in numbers. Suggestions that corporate income tax cuts benefit workers have been derisively dismissed as “trickle-down economics”, but there’s data backing the idea that corporate income tax cuts increase wages.
And it’s not because corporations with more spare cash want to give more to their employees because they’re just so nice. Rather, corporations with additional room in their budgets are able to spend more on capital investments, which in turn makes their workers more productive. More productive workers receive higher compensation, because they’re more valuable to the business they’re working for.
Economists differ in their estimates of what percentage of the incidence of the corporate income tax is borne by labor. Economists at the Tax Foundation have estimated that the percentage could be 70 percent or higher, while the Tax Policy Center estimates that it is only 20 percent. Nevertheless, no serious economist would argue that labor bears none of the cost of corporate income taxes.
High corporate income tax rates can also hurt workers in other ways. It’s popular to hit multinational companies for offshoring jobs and profits, but that’s what will happen when the American tax structure is inhospitable. The TCJA attempted to rectify this.
Not only did the TCJA lower the American corporate tax rate from one of the highest in the world at 38.91 percent to a more middle-of-the-road combined rate of 25.77 percent, but it also stopped punishing multinational corporations for attempting to bring overseas profits back to the United States. This latter change brought the U.S. in line with the rest of the developed world and resulted in the repatriation of over $1 trillion in assets.
Other corporate tax provisions indirectly benefit working Americans as well. Full expensing of capital investments costs the federal government next to nothing in the long run, as it allows businesses to receive tax breaks for capital investments immediately rather than many years down the line. Yet business investment is crucial for increasing wages — as investments enable American workers to become more productive, their compensation also increases.
If you said something like “corporations did nothing productive with their savings from tax reform, they just engaged in stock buybacks”
Well, if you’re picking up on a theme, you may have guessed that you’re wrong. If you guessed that, you’re right! You’re wrong.
It’s true that stock buybacks increased in the wake of the TCJA. It’s also to be expected and means very little. Progressives often portray stock buybacks as the offending corporation flushing money down the toilet, accomplishing nothing but rewarding stockholders. That’s a very myopic view, however.
Stock buybacks are better analogized as a corporation putting spare cash into its savings account. It's true that by reducing the amount of shares owned by stockholders, corporate stock buybacks increase share values. But they also give corporations flexibility to raise cash in the future should opportunities for productive investments become available.
And there’s strong evidence that corporations only engage in share buybacks when all other opportunities for productive investments are exhausted. Despite progressive claims that corporations are rewarding shareholders instead of investing, there’s simply no evidence of any connection between increases in share buybacks and decreased economy-wide investment. In short, corporations are taking the revenue left over after making all available productive investments and saving it for later. That’s not really a bad thing.
Benefits to stock price values also provide more benefits to the average American than one might think. In 2016, 52 percent of Americans owned stock either directly or through a retirement account, mutual fund, or pension, only slightly less than the percentage of Americans who paid taxes that year (56 percent).
NTUF estimated that increased share buybacks could increase the growth in the value of the median stock or mutual fund portfolio by $467 the next year, while also estimating that the median retirement account would grow by $723 more the next year.
In short, stock buybacks are hardly the investment killers you probably suggested they were, and they help out average Americans’ investment and retirement planning a bit as well on top of that.
If you said something like “the TCJA was a massive increase to the national debt”
This is not exactly wrong, since TCJA did reduce revenues by about $1.4 trillion. But it lacks context, and also paints an inaccurate picture that TCJA is the primary cause of America’s deficit problems.
If you believe that, then your eyes must be permanently popped out of your head at this point from looking at the size of legislation that has come out of Congress since the TCJA was passed. Legislation proposed and voted for by the same people who decried the TCJA’s budget impact has combined to dwarf the TCJA’s budget impact, which the National Taxpayers Union Foundation has estimated at $1.4 trillion, even after assuming the extension of expiring income tax provisions.
We’re not just talking about the CARES Act from the beginning of the COVID-19 pandemic, estimated to cost between $1.7 trillion and $2.2 trillion,1 or President Biden’s proposed $1.9 trillion stimulus plan, or the $3.5 trillion HEROES Act which was passed by the Democratic House.
We’re also referring to the 2018 Bipartisan Budget Act, which removed caps on Congressional spending, and was estimated to cost over $300 billion over just two years (that’s about 50 percent more added to the deficit yearly than TCJA, the $1.4 trillion budget impact for which is spread out over ten years). The recently-passed Consolidated Appropriations Act is also projected to increase outlays by over $1.6 trillion (of which just over half is pandemic-related). The previous year’s appropriations bill increased outlays by just under $400 billion.
None of this begins to even compare to legislative proposals made by legislators who opposed the TCJA ostensibly on deficit grounds. Bernie Sanders’s (I-VT) Medicare for All plan, endorsed by many legislators, would increase spending by $32 trillion over ten years. Rep. Alexandria Ocasio-Cortez (D-NY) has introduced legislation for a “Green New Deal” with over 100 cosponsors which she estimates would cost “at least $10 trillion” — others have estimated this figure as high as $93 trillion.
If you wish Congress would take deficit reduction seriously, we’re right there with you. That’s why we and our colleagues at our sister organization NTU have worked in a bipartisan manner to lay out a wide range of reforms to help address the problem. But as much as we here at the National Taxpayers Union Foundation wish that legislation with a $1.4 trillion budget impact was enough to make members of Congress queasy, it barely registers in Washington as “significant” and pales in comparison to other, more expensive bills.
If you said something like “the TCJA caused people to lose their tax refunds”
You’re wrong, and you fell victim to the whims of the media cycle. This mistaken belief came out of the simple fact that “preliminary information shows average tax refunds are down” was a very interesting news story, while neither context nor the fact that average tax refunds overall returned to normal by the end of that tax season were as interesting. The first story caused a media feeding frenzy, the latter two barely received a passing mention.
Two weeks into the 2019 tax filing season, the average tax refund was indeed down by 8.7 percent. This fact was lacking important context, however — a government shutdown had left the IRS short-staffed and badly behind, leading to taxpayer services suffering. It stood to reason that more complex returns, which often return higher tax refunds, hadn’t gotten filed yet.
And as we said at the time, tax refunds would probably go back to normal by the end of tax season. Sure enough, they essentially did. Just two weeks later, average tax refunds were up compared to the previous year. By the end of the filing season, tax refunds were within 1.5 percent of the previous year.
Of course, “2019 tax refunds end up within 1.5 percent of 2018” is a news story that is barely interesting to us, and we work in tax policy. Unsurprisingly, it didn’t get much play in the media.
The whole story was particularly silly because the size of tax refunds is a rather arbitrary measure of tax liability. Tax refunds are better seen as overwithholding, or a zero-interest loan the government took from you for a year then paid back. Ideally, you should want no tax refund at all, because that would mean that Uncle Sam didn’t siphon off more of your paycheck than he was owed at the time.
If you said something like “tax reform hurt blue state taxpayers because it capped the SALT deduction”
First off, you’re wrong to defend the SALT deduction even if this was true. Though Democrats have very successfully made the SALT deduction into a “red team versus blue team” issue, Democrats concerned with making the tax code more progressive should want to get rid of the SALT deduction.
The state and local tax (SALT) deduction allows taxpayers who itemize their tax deductions (an important point we’ll come back in a moment) to deduct the value of taxes paid to their state and local governments against their federal tax liability. The TCJA capped the value of this deduction at $10,000.
Now, even prior to the TCJA, taxpayers who itemized their deductions (as opposed to taking the standard deduction) overwhelmingly skewed wealthier. In tax year 2015, 78 percent of itemizers had an adjusted gross income (AGI) above $50,000. Just over 17,000 taxpayers collected a tenth of the total benefit taxpayers received from the deduction, and the top 3 percent of taxpayers collected 38 percent of the benefits. Just 3.5 percent went to taxpayers with an AGI below $50,000.
Not only did the TCJA cap the value of the SALT deduction, but by increasing the standard deduction, the TCJA reduced the number of taxpayers affected by it. Post-TCJA, less than 10 percent of taxpayers claimed the SALT deduction, and the top 40 percent of taxpayers see just under 94 percent of the total benefit. In other words, if you’re claiming to be hard-hit by the capping of the SALT deduction — you’re probably wealthier than the average taxpayer.
If the cap on the SALT deduction were repealed, it would be a tax benefit for the wealthy more extreme than anything in the TCJA. The wealthiest 1 percent of taxpayers would receive more than 56 percent of the benefit, while the top 5 percent would receive over 82 percent of the benefit. It really is impossible to simultaneously criticize the TCJA for benefiting the wealthy while also advocating for removing the cap on the SALT deduction.
And we haven’t forgotten how wrong you were about the SALT deduction cap causing the TCJA to hurt taxpayers. The SALT deduction cap did not take place in a vacuum — it came in the context of broad-based rate reductions, increased exemptions for the Alternative Minimum Tax, and other changes. As the Center on Budget and Policy Priorities rightly points out, the income groups most affected by the capping of the SALT deduction, namely taxpayers in the 95-99th percentiles, still received a substantial net tax cut from the TCJA overall.
In total, we know that the vast majority of Americans received a tax cut. Of those few who saw a tax increase, we know that they are concentrated towards the top of the income distribution. Just 1.2 percent of Americans in the bottom 20 percent of taxpayers saw a tax increase, compared to 6.2 percent of the top 20 percent. Over 80 percent of all taxpayers received a tax cut, and just 4.8 percent of taxpayers saw a tax increase.
So why all the hubbub about the SALT cap? Put simply, you got drawn into defending a provision that states use to justify their own high state taxes. High-tax states are able to effectively offer their wealthy residents a “discount” on tax increases by pointing out that they can write off the tax increase at the federal level. Capping the SALT deduction makes wealthy residents feel the full bite of high marginal tax rates.
A group of high-tax states were so threatened by this change that they launched a doomed lawsuit aimed at undoing the change. Democratic leaders in Congress representing states like California and New York have put undoing the SALT cap at the top of their legislative wish lists. New Jersey almost canned its proposed “millionaires’ tax” over fear of how it would affect the state in the wake of the SALT cap.
Spare those taxpayers affected by the SALT cap your tears. They probably received a net tax cut anyway.
NTUF may add to this post as time goes on and new misconceptions enter the political milieu.
1 The variance here comes from uncertainty about how many emergency business loans guaranteed by the federal government will be paid back. The Congressional Budget Office scored all $454 billion in loan guarantees as costing the federal government nothing, but that would only be if every loan dollar was paid back — something that will almost certainly not be the case. The true cost probably lies somewhere in between the two numbers given.