By Ryan Ellis
Tax nerds in the Beltway went wild this past weekend with President Trump’s announcement of a new middle-class tax cut. First unveiled in a trademark Trump arena speech, and later clarified by the White House, the plan is to pass a 10 percent tax cut for the middle class on top of the large middle-class tax cut contained in the Tax Cuts and Jobs Act of last December. No one is quite sure of language, timetable, score, how to do this with Congress out campaigning, or virtually any other detail.
The initial bit of context to recall is that the middle class has seen a sharp reduction in their income tax burden thanks to President Trump’s December 2017 tax cut. According to the liberal Tax Policy Center, the middle tier of taxpayers (those with incomes of $49,000 to $86,000) saw an average 2018 tax cut of $930, a 12.4-percent reduction in their total federal tax burden. That amounts to a 1.6 percent increase in after-tax income for this tier.
Why is that? There are three principal middle-class tax cuts that were part of the Tax Cuts and Jobs Act. First, the middle-class marginal tax rates of 15 and 25 percent were lowered to 12 and 22 percent, respectively. Second, the child tax credit was doubled from $1,000 to $2,000 per child. Finally, the standard deduction (aka “zero bracket”), which is nearly universally used for taxpayers in this income neighborhood, was doubled to $24,000 for married couples and $12,000 for singles. The latter two tax cuts were partially offset by the loss of the personal and dependent exemptions. All three of these tax cuts combine to create the middle-class tax cut measured by the Tax Policy Center.
Unfortunately, budget reconciliation and Senate supermajority requirements mean that this middle class tax relief is set to expire in 2026. That’s why the House of Representatives voted to make this tax relief permanent before going home to run for re-election this fall. For their part, congressional Democrats overwhelmingly voted against this middle-class tax certainty, and have been very cagey about what expiring tax provisions in particular they would make permanent if in the majority. President Trump has endorsed efforts to make the middle-class tax cut a part of permanent law.
Nonetheless, the president has made it clear he wants to cut middle-class taxes even more than he already has. That’s obviously welcome news for working families, and Republicans should always look for opportunities to cut taxes for them. There are a number of ways the president and Congress can do that.
For prime-working-age taxpayers in this income tranche, it is very likely that their biggest federal tax liability is not the income tax (especially after this last tax cut), but the payroll tax (or Federal Insurance Contributions Act). Between the employer and the employee portions of the tax (both of which effectively come out of the worker’s wages), a middle class employee loses 15.3 percent of his wages to FICA.
A family of four with two dependent children earning $80,000 per year has a $12,240 FICA tax. However, that same family’s income tax burden is just $2,300 — the Tax Cuts and Jobs Act already cut this number in half. There’s just not much more income tax to cut for middle class families. There’s plenty of FICA tax to cut.
If the desire is to keep the tax cut on the income tax side of the ledger, there are two good options the president might explore. The first is collapsing the 10 percent tax bracket into the expanded standard deduction. This would increase the “zero bracket” from $24,000 for a married couple to $44,000. For a single worker, the amount of income earned with no tax owed would increase from $12,000 today to $22,000.
This plan would have the added benefit of further reducing the number of taxpayers electing to claim itemized deductions like the state and local tax, mortgage interest, and charitable contributions. Already confined to the top 11 percent of taxpayers according to Congress’ nonpartisan Joint Tax Committee (down from 30 percent before the Tax Cuts and Jobs Act), itemized deduction households would be limited to the wealthiest 5 percent or so Americans. Future tax reform would, as a result, be much easier to enact.
Yet another option here would be to increase the child tax credit from $2,000 (already doubled as a result of the Tax Cuts and Jobs Act) to $2,500. This would round out the target child credit amount pursued by Ivanka Trump in the lead-up to tax reform. In so doing, there would be no need to also increase the refundable “additional child tax credit” from where it stands — this tax cut should only be available to income taxpayers.
It’s clear that middle-class families were a big winner in the Tax Cuts and Jobs Act. The priority going forward is making sure that this tax relief is not taken away from them and their taxes are not raised by liberals in Washington. If there’s a desire to cut middle class taxes even more, President Trump should look at the FICA tax, or expanding the “zero bracket,” or making the child tax credit larger.