The GOP's Populist Messaging on Tax Cuts for the Ultra Wealthy

GOP messaging on tax reform has been interesting to say the least. Tax cuts for the wealthy are very unpopular, except among the GOP donor class. 'Trickle Down' economic theory, which asserts that low taxes on corporations and wealthy individuals spurs economic growth that ultimately benefits everyone in society, is also a tough sell. Empirical studies have shown that in reality, such cuts do the opposite of what trickle down theory says they should; they increase budget deficits (which Republicans supposedly care about), and even diminish economic growth. The abject failure of high tax cuts in Kansas serves as a recent warning of just how damaging these policies can be to the economy.

At the end of the day, the GOP donors want their tax cuts though, so it is up to the GOP to pitch them to the American people. They have set up a website fairandsimple.gop to make their case. Read the whole site if you have time, it is truly fascinating, and the way they talk about elimination of various tax deductions is particularly interesting. Elimination of certain itemized deductions are discussed under the heading: "Eliminates loopholes for the wealthy, protects bedrock provisions for middle class."

This clearly invokes some of the populist messaging that has been used by various candidates that appeals to the sense that many have that the wealthy in the country do not pay their fair share in taxes. Combine that with the fact that the GOP plan doubles the standard deduction, which lowers the tax liability for those who do not have very many itemized deductions, and it seems like perhaps the GOP is really making an honest effort to lower taxes for the middle class.

A compelling case can be made that itemized reductions are indeed regressive benefits, which we can see using tax return data from the IRS by zip code in New Jersey as an example. Below the total reported income per capita is plotted against the total state and local tax deductions per capita. State and local tax deductions include state and local income tax, property tax, and sales tax which may be used as an itemized deduction to reduce one's federal income tax. The relationship between these two quantities is incredibly strong, indicating that the value of these deductions is greater for those with higher incomes.

IncomeVsSALT.png

So there you have it, the GOP is now a party for common folks. Except also included in the plan is the reduction of the top marginal tax rate (for incomes over $418,410 for a single person for example) from 39.6% to 35%. Analysis has shown that for the highest earners, the lowered rate along with other provisions of the plan will more than offset the loss of itemized deductions, and lead to very large cuts for these individuals. That leaves people in the upper middle, particularly in blue states where state and local taxes are high, in a position where they lose key deductions but do not make enough money to benefit from the decrease in the top tax rate. Overall most of these individuals will likely see their taxes go up. The GOP can certainly try to sell this as form of progressive taxation, since a portion of people making more than the national median will be paying more in taxes while many at or below the median income will see their taxes go down.

There are two problems with this however, and the first is the fact that upper middle class individuals in blue states make up a substantial proportion of the republican base in those states. We recently took a look at how many stand to lose their state and local tax deductions in New Jersey's 11th district, which has been held by Republican Rodney Frelinghuysen for over two decades. Whether or not blue state Republicans will vote on behalf of their voter base or their donor base has yet to be seen.

The second problem is that the income distribution is so heavily skewed toward the top 0.1% of earners that any definition of the middle class becomes somewhat arbitrary. The statistical concept of central tendency allows us to quantify 'the middle' of a distribution, but multiple definitions such as the mean or the median can be used to characterize the middle of skewed, or asymmetric, distributions. So what would be an appropriate definition of the middle for incomes in the US? Let's again take a look at the NJ tax data by zip code. Below is a histogram showing the number of zip codes whose per capita income falls within a given range. The 50th, 60th, 70th, 80th, 90th, 99th, and 99.9th percentiles are also shown.

IncomeDist.png

This distribution is incredibly skewed as it is, and the fact that these figures are averages over zip codes actually reduces the skew that we would observe if we were using the distribution of individual returns. Note the difference between the 50th percentile (which is the median) and the 90th percentile compared to the difference between the 99th percentile 99.9th percentile. The neighborhood of the 80th and 90th percentile are most likely to see their taxes go up under this plan which the GOP is trying to frame as good for the middle class, but these percentiles are much closer to the median than they are to 99.9th or even the 99th percentile. After observing just how skewed the income distribution is, it becomes clear that this framing is nothing more than a semantic trick that hides the fact that the GOP plan gives massive tax cuts to the ultra wealthy on the backs of the middle class. As dishonest as it is, it could be a successful strategy given how completely unintuitive skewed distributions are. Lastly, since this tax reform is not revenue neutral and will therefore increase the budget deficit, cuts now just mean tax increases later. When that time comes, it seems very unlikely that the GOP would be willing to raise taxes on their donors in the top 0.1% of earners. It's more likely that many of those in the middle and working classes who stand to benefit from this round of tax reform will see their taxes go back up, or their government services cut.


You can find the code and data for generating the content in this post on GitHub.