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IS U.S. TAX REFORM ACTUALLY FAIRER?

The actual framework for personal income tax in the United States consider seven different brackets (table 1).

Schermata 2017-10-01 alle 10.03.53Table 1: 2016 U.S. personal income tax brackets[1]

On the 29th September 2017, Trump administration released an official document called “Unified Framework For Fixing Our Broken Tax Code[2]” stating White House’s tax plan.
One of the main goal of this reform is a tax relief for middle class families, and it is supposed to achieve this aim through a cut of the number of the brackets from seven to three, setting three different tax rates of 12%, 25% and 35% (table 1, last column).

America’s tax code should be working for, not against, middle class families[3]

The Unified Framework is supposed to work to chase a distributional effect that should support middle class families, but does it for real? An analysis from the Urban Brooking Tax Policy Center (TPC) help us to find it out.

According to the TPC, in 2018 taxes would decline by nearly $1,600 on average, and after tax income would rise by 2.1%. This could look like a positive distributional effect, but if we look at the data of table 2 we can see how actually are taxpayers in the top 5% of the income distribution to lift the average.

Taxpayers in the lowest quintile of the income distribution will face a federal tax cut of just about $60, while taxpayers in the top 1% will save $129,030 and the ones in the top 0.01% will see their after tax income increasing of about 10.2% that means $722,510 saved.
Furthermore, some deductions and exemptions (which currently give taxpayers a $4,050 deduction for every person in the household) will be repealed.

Schermata 2017-10-01 alle 09.59.03Table 2: change in after tax income, 2018[4]

Besides, the Tax Policy Center has estimated that this tax framework would produce a fiscal revenue loss of around $2.4 trillion over the first decade and a loss of $3.2 trillion  over the following one.

If White House’s main purpose is seeking a redistribution of wealth, this tax reform doesn’t look like the best way to do it. The top 1% taxpayers will benefit of the 53.3% of the total federal tax change. Moreover, during 2027 the overall tax cut would be smaller such as the after tax income growth (table 3).

Schermata 2017-10-01 alle 12.10.24Table 3: change in after tax income, 2027[5]

This huge tax reform has been one of the main reason why Donald Trump has been elected, but looking at the data it looks like the middle class will not be the one who will benefit the most from the new framework. Actually such a tax plan with such a fiscal revenue loss could bring at raising tax rates in the future, with the middle class families who would be the first ones to suffer from them.

References:
[1] http://www.taxpolicycenter.org/publications/preliminary-analysis-unified-framework/full
[2] https://www.treasury.gov/press-center/press-releases/Documents/Tax-Framework.pdf
[3] See note 2
[4] See note 1
[5] See note 1

Lorenzo Petitti, 30796

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Author: studentnovasbe

Master student in Nova Sbe

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