Tax law helps low- and middle-income, but mostly the wealthy

Bruce Jenket’s thoughtful letter of July 29 to The Laconia Daily Sun directed several questions to me. The questions and my responses follow.

Jenket question #1: “Did the TC&JA reduce the income tax percentages paid by low- and middle-income wage earners?” My answer: Yes.

Jenket question #2: “Did the total taxes paid by the top wage earners increase as a result of the TC&JA? Yes or No?” My Answer: No. The TC&JA is 186 pages of densely packed tax legislation. Sorting out the effect on segments of the income distribution requires real expertise, data, and analytics. I am not going to undertake that effort. Instead, I rely on third-party experts. The Joint Committee on Taxation estimates that, in 2018, the TC&JA reduced taxes owed by those earning $1 million or more by some $37 billion. The Tax Policy Center estimates effective tax rate reductions from the TC&JA to be 0.4% for the lowest income quintile, 1.2% for the 2nd income quintile, 1.6% for the 3rd income quintile, 1.9% for the 4th income quintile, and 2.9% for the highest income quintile. All quintiles’ effective tax rates declined with the percentage point reductions rising with income. The percentage point reduction for the top quintile was seven times the percentage point reduction for the lowest quintile, 2½ times the reduction for the 2nd quintile, and over 2 times the percentage point reduction for the middle quintile.

Mr. Jenket is correct: Somebody pays for it. But TC&JA is not being paid for by households in the high end of the income distribution. It will be paid for by future generations. Already federal government receipts are failing to meet the overblown expectations of the supporters of the Trump tax cuts. The multiplier effects and federal tax receipts projected in support of the TC&JA are and will continue to be more aspirational than real. As a consequence, the higher federal deficits produced by the Trump tax cuts will be paid by our children and grandchildren.

Jenket Question #3: “Have wages for low- and middle-income workers improved since President Trump was elected?” Answer: Yes. But it is worth noting that real incomes for all quintiles of the income distribution by households have been rising since 2010. With economic recovery and expansion, incomes rise.

Mr. Jenket argues that the point of the TC&JA was to put money in the pockets of low- and middle-income Americans. True, it did that. But the largest share of the money went elsewhere. As noted above, the direct impact of TC&JA on effective tax rates was regressive. Increasing the Estate and Gift Tax Limit by a factor of more than 2 from $5.49 million to $11.19 million surely benefits the wealthiest among us and their successors, not low- and middle-income households. The tax savings given corporations went largely to shareholders, the high end of the income distribution, directly via share buybacks and indirectly via rising stock prices. Reductions in capital gains taxes accrue predominantly to the upper tiers of the income distribution. If, as Mr. Jenket suggests, the purpose of TC&JA was to put money in the pockets of low- and middle-income households, the bill could have been far more tightly focused and a fraction of its 186 pages in length.

Despite Jenket’s inference, I certainly don’t wish for the demise of the wealthy. I do not object to wealth creation when it is derived from adding value. I do object, however, when wealth creation is skewed toward the wealthiest among us by the stroke of a Presidential pen. That said, today’s concerns about the distributions of income and wealth cannot be laid uniquely on the Trump administration. Lower- and middle-income households have failed to meaningfully share in the growth of the economy for an extended period. From 1977 to 2017, the median real income of households in the bottom quintile rose less than 0.2% per annum, the second quintile by 0.4% per annum, the third quintile by less than 0.5% per annum, the fourth quintile by 0.75% per annum and the top quintile by 1.3% per annum. Four decades of such differences compound to dramatically reshape the distribution of income and wealth. In 1977, the mean real income of the top quintile was 10.6 times that of the bottom quintile; 40 years later, it was 16.7 times greater. We are approaching patterns of income and wealth distribution last seen in the gilded age.

Jenket attributes the left’s negative view of this pattern to “jealousy.” For some, that is no doubt true, but certainly not for all, and probably not even for most. There is a long, rich history of the development of thought on the distribution of income and wealth from versions of the Golden Rule found in virtually every religion to secular theories of justice from the ancients like Plato and Aristotle through Kant and to more recent discussions such as Rawls “veil of ignorance” and “difference principle.” Some are mere sound bites, e.g., Does Marie Antoinette's statement from the perspective of meritocracy really produce a stable civil society? (“Let them eat cake” didn’t work too well for her and the king!) And to his credit, Jenket notes that income should reflect the value added to society and fairness.

Each of us has to choose our view of a fair distribution of income and wealth and the policies directed to that end, weighing both the effects on a just society and on its performance, including economic growth. Too often we think statically in these discussions ... redistribution today. But the discussion of the distribution of income and wealth is not just a matter for today; it also has to do with the future. Because the effects of differences in income and wealth persist across generations, the current trajectory of the distribution of income may well accelerate if nothing changes.

In the 2016 election, I believe that we heard the voices of voters for whom the system wasn’t working, whose expectations of the life they would lead were not being met, and whose hopes for their children and grandchildren were fading. That cannot be ignored by either the Right or the Left. This is too important and difficult a topic to attribute different points of view on the distribution of wealth and income to jealousy. What is required is a thoughtful, informed dialogue.

Eric Herr

Hill