Cutting Taxes and Making Future Americans Pay for It: How Trump’s Tax Cuts Could Hurt Many Households

Research Report

Cutting Taxes and Making Future Americans Pay for It: How Trump’s Tax Cuts Could Hurt Many Households

Abstract

Tax cuts often look like “free lunches” for taxpayers, but they eventually have to be paid for with other tax increases or spending cuts. We examine the distributional effects – with and without financing – of a tax plan consistent with the outline the Trump Administration produced in April. When ignoring financing, the plan would be regressive; most households would be better off, but the highest income households would get the largest percentage boosts in after-tax income. Including financing – based on either equal costs per household or an equal proportion of each household’s income – would make the overall plan far more regressive and would leave the vast majority of households worse off than they would be if the tax cuts were not implemented in the first place. If financing were proportional to households’ current income tax liability, the results would be more mixed, though top income households would still receive the largest cuts. These results show how important the method of financing is to understanding the ultimate distributional effects of tax proposals.

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