Abstract:
The Tax Cut and Jobs Act of 2017 (TCJA) represents the most significant change in U.S. taxation since 1986. The bill’s fairness and welfare impacts have been studied and widely debated. But prior distributional analyses suffer from three shortcomings. First, they examine changes in current gross, not remaining lifetime net taxes. Second, they lump together the young and the old, leading to misleading comparisons. Third, they ignore the reform’s potential impact on the distribution of pre-tax income.
This paper responds to these limitations in identifying winners and losers under the TCJA. It uses The Fiscal Analyzer (TFA) – a program developed to understand fiscal progressivity, work disincentives and spending inequality. TFA is a detailed life-cycle consumption-smoothing program that incorporates borrowing constraints, lifespan uncertainty and all major federal and state tax and transfer programs. TFA calculates for different resource groups within specific cohorts remaining lifetime net taxes and remaining lifetime net spending. Its calculations can, in turn, be used to a) form resource- and cohort-specific average and marginal remaining lifetime net tax rates, b) measure absolute changes in remaining lifetime spending for particular resource groups within particular cohorts and c) assess changes, within-cohort, in remaining lifetimespending inequality. The paper’s measurements result from running the Federal Reserve’s 2016 Survey of Consumer Finances through TFA based on both old tax law as well as the TCJA. In so doing, we consider two alternative assumptions about the new tax law’s impact on real wages. The first is zero impact, which lets us consider the impact of the tax reform on its own. The second is a 5.5 percent increase in real wages – a figure suggested by analysis in Benzell, Kotlikoff and Lagarda (2017b).
We find, for all resource (human plus non-human wealth) groups within all cohorts, very modest reductions in average remaining lifetime net tax rates (remaining lifetime net taxes of a resource quintile divided by remaining lifetime resources of that resource quintile) regardless of resource level. We also find very little within-cohort change in fiscal progressivity whether one measures fiscal progressivity by the share of total net taxes paid by the richest 1 percent, the share of spending done by the top 1 percent, the percentage increase in average spending by the top 1 percent compared to other resource groups, or the degree to which average remaining lifetime net tax rates rise with resources. This said, the absolute average net tax reductions that the rich will enjoy are dramatically larger than those provided to the poor. But tax cuts, even progressive ones, can produce such a result since the rich pay dramatically more taxes per household than do the poor.
TCJA impacts the distribution of resources, albeit modestly, among similarly placed households – households within the same cohort and resource quintile. Consider, for example, middle quintile, 40-49 year olds. Leaving aside potential wage increases, TCJA produces less than a 1.0 percent rise in lifetime spending for 9.9 percent of households in the cohort and a larger than 3.0 percent rise in lifetime spending for 4.3 percent.