Nobody Wants This

Tax cuts are expensive and ineffectual, it's time for a new era

Sigh, Let’s Start with Congress and What’s Happening Right Now

I struggle to understand the rules and procedures of Congress, but here’s what I know: Republicans are using the reconciliation process to pass a tax cut that will costs around $4.6 trillion with simple majority, rather than two-thirds majority.

The origin of this cut is back in 2017, when Republicans used a similar process to pass the Tax Cut and Jobs Act. It costs $1.9 trillion. Because it was so expensive, most the provisions that applied to household filers (as opposed to corporate filers) were temporary; they expire in 2025. Republicans want to pass another tax cut to extend those rates. If passed, it will be (I’m pretty sure) the most expensive piece of legislation in US history.

And at the risk of painting with too broad a brush: nobody wants this.

We’ve had a lot of practice at tax cuts by now, and enough experience to know that they are bad policy. There is no bang for the buck.

$4.6 Trillion in Tax Cuts is a Squandered Opportunity

The Congressional Budget Office estimates the cost of proposed legislation over a ten-year window and the resulting ‘score’ is the sum over those years. So the 2017 Tax Cut and Jobs Act, which came in at a score of $1.9 trillion reflects an average $190 billion per year cost. The tax cut currently being prepared will be $4.6 trillion, or $460 billion per year. (Republicans are trying to offset the $4.6 trillion cost of the tax with cuts to spending to reduce the net cost of the bill, but that won’t change the cost of the cuts themselves.)

So let’s look at some other ten-year costs.

• Starting up a universal paid family and medical leave program scores at $200 billion.

• Universal preschool for three- and four-year-olds as well as capped child care costs for children under 3 scores at $350 billion. So if you wanted to go fullly free and universal, a generous estimate is $500 billion.

• The federal government currently spends $250 billion for free and reduced school lunch, which goes to about half of children, so a rough estimate for the score of universal school meals is $500 billion.

• The fully expanded and refundable Child Tax Credit (which was in place in 2021, provided a minimum income for all children, and lifted 3+ million kids out of poverty) scores at $1.6 trillion.

• Congress currently owes Social Security $2.7 trillion. That’s the value of Social Security’s trust fund which is held as treasury bills. Social Security is currently drawing down this fund is expected to deplete (i.e. paid back fully by Congress) by 2035.

So let’s put that all together.

Over the next ten years Congress could start a universal paid leave program, universal free childcare for all children ages 0 - 5, two free meals at school for every public school student in the US, and establish a minimum income for children through the Child Tax Credit and the total score is $2.8 trillion. You could do all that AND have enough money to pay back two-thirds what is owed Social Security for the size of the tax bill that Republicans are trying to pass.

I reckon it would be the largest investment in children the US has ever made and it would be transformative.

If tax cuts were some magical cure all to the economy that would work just as well as paid leave, child care, school meals, and halving child poverty could, that would be one thing. But we know that they don’t, because we’ve been here before—$7 trillion times before.

Learning from a $7 Trillion Experiment, Part 1: The Economy

I’ve written about this previously, but I call this our “$7 Trillion Era” because Congress has passed four tax cuts this century. Here’s the official names and projected ten-year score according to the Congressional Budget Office:

• 2001 Economic Growth and Tax Relief Reconciliation Act: $1.26 trillion

• 2003 Job Growth and Tax Relief Reconciliation Act: $350 billion,

• 2012 American Taxpayer Relief Act: $3.6 trillion,

• 2017 Tax Cut and Jobs Act: $1.9 trillion

Which totals $7.11 trillion.

Those cumbersome names tell you a lot: tax cuts are motivated by the desire to grow the economy and provide relief to tax payers. On both fronts, tax cuts fall far short.

When I testified in front of the House Ways and Means Committee last year, I pointed out that their own research bureau, the Congressional Research Service, estimated that the 2017 law added 0.2% to GDP, which was actually below forecast, and the forecast themselves were just 0.3%-0.8%. For reference, the bill would have had to have added 6.7% to GDP to “pay for itself,” which is a ludicrous notion.

Here’s my testimony:

keds_economist

A post shared by @keds_economist

The other motivation is providing relief to taxpayers. Tariffs have already started to shrink the economy and banks/economists are forecasting a higher probability of recession. A lot of Americans may need relief soon. But tax cuts are an expensive and ineffective way to do it.

Learning from a $7 Trillion Experiement, Part 2: You!

The US has a marginal-bracket system; Congress doesn’t assign a tax rate to total income (i.e. you pay 15%) but a marginal rate to portions of income (i.e. you pay 10% on the first $11,600 and 12% on the next $31,000, and so on). Plus, it has ways to reduce your income or your tax bill through deductions and credits. The average tax rate is the result of all those components.

So the before-and-after picture of the $7 trillion is the average tax rate before any of these cuts (2001) and after (2021), which I show below for groups of taxpayers ranked by their income. Everyone saw a reduction:

Source: Statistics of Income, IRS.

So the net effect of the tax cuts is the difference in what the average tax rate used to be (in red) and what it is now (in blue). I can apply that to income and put a dollar amount on each income group. I do that below in the table.

For example, in the top row:

• The top 0.1% is defined as those households who earned at least $3.8 million dollars in 2021. They used to pay a 28.2% average rate, but now it’s 25.7%. Apply that rate difference to $3.8 million and they are keeping a minimum of $91,694 of extra dollars from the tax cuts.

Source: Statistics of Income, IRS

After that, I show the range of income within a group and apply the rate difference to the top and bottom of the range. For example, the second row:

• The rest of the top 1% earns at least $680,000 but less than $3.8 million. Their average rate fell by 1.67. I apply that to their income range to get a range of $16,577 - $11,407 that they are keeping from the tax cuts.

What you can see in the table is that for the bottom 95% of income filers, the net effect of the the $7 trillion era is about a thousand extra bucks a year, a little more if you earn more and a little less if you earn less.

These numbers aren’t predictive, their illustrative. They show you how tax cuts could be both enormously expensive while ineffectual at the same time. In reality, your actual tax bill would depend on your situation and how savvy you are at filing taxes. But on the whole, it’s a grand.

What $1000 Doesn’t Solve

As far as economic relief goes, giving most Americans $1000 doesn’t translate to addressing the root of their economic problems. Consider:

• Housing costs:

  • Zillow estimates the average montly rent is $1,827.

  • apartments.com comes in slighly lower at $1,624.

  • Bankrate estimates average mortgage payment at $2,225.

• Child care costs:

  • The Department of Labor estimated in 2022 that the median child care price for a single child was between $5,000 and $15,000 per year, depending on the age of the kid and the type of care.

  • Care.com surveys parents and comes in much higher in 2025, averaging $17,888 per year.

I could keep throwing numbers at you but you know the reality of your own life. I’m not sleeping on $1000, but rememeber this $1000 cost $7 trillion. And when you think of what else that money could have been spent on, it can feel even more expensive.

This is why I write off the impending tax cut with “nobody wants this.” Tax cuts can provide relief for a problem, but they can’t solve a problem. And in this case, the relief is more expensive than the solution.

I’m Still Not Mad

On one level, I get that this is infuriating. What can $4.6 trillion do that the first $7 trillion didn’t? We’ll soon find out that the answer is, indeed, not much.

I keep going back to “nobody wants this.” I’ve found it fascinating to read articles about constituent town halls where the palpable anger and frustration of Americans is directed back at their representatives. Republicans have openly embraced the policy of not talking to their constituents in any public, open setting. Check out this highlight from the AP:

“MECHANICSBURG, Pa. — Many days over the past two weeks, no one answered the phone at any of U.S. Rep. Scott Perry’s four offices.

Perry’s team did not share details about the Republican congressman’s public appearances until they were over. Even supporters who live in Perry’s central Pennsylvania district could not remember the last time he hosted an in-person town hall.

No one opened the locked door at his district office in Mechanicsburg last week when an Associated Press reporter rang the bell. A male voice said through the intercom, “I don’t have any public appearance information that I can provide.”

Y’all, do you think they are locking their doors and speaking through intercoms because they are being inundated with pleas to hurry up and pass a tax cut? Americans are mad and scared about so many things, but it’s not as if they are rising up in a chorus, united in their hope for a $4.6 trillion extension to the TCJA.

It’s bad policy, top to bottom. And every economic frustration that propelled Republicans into power will be left waiting for the next election.

Photo by Jon Tyson on Unsplash