The New Tax Law’s Impact on Inequality: Minor but Worse if Accompanied by Regressive Spending Cuts

William Cline

No PB18-3, Policy Briefs from Peterson Institute for International Economics

Abstract: The centerpiece of the Tax Cuts and Jobs Act (TCJA) of 2017 is the reduction in the corporate tax rate from 35 percent to 21 percent. The Joint Committee on Taxation has estimated the net revenue loss from the tax overhaul at $1 trillion over the next decade. The underlying premise of the legislation is that lower corporate taxes will spur growth, with trickle-down wage benefits that spread the resulting economic gains. This approach, however, risks increasing inequality in income distribution, potentially leaving those in the lower income groups worse off than before. Two factors contribute to this risk. First, the personal tax cuts expire after 2025 whereas the corporate tax cuts are permanent. Second, there will be a sizable loss of revenue, and compensating cuts in federal expenditures could wind up being concentrated on benefits received by lower-income groups. This Brief uses the estimates of the congressional Joint Committee on Taxation (JCT) to examine the distributional impact of the tax bill. It then considers the further changes that would occur if there were regressive expenditure cuts applied to make up for the revenue loss (as illustrated using the distributional profile of Medicaid spending). The broad result is that the direct effect of the legislation on income inequality is relatively minor, but the overall effect could be much more unequal if induced spending cuts were concentrated on programs oriented toward low-income groups.

Date: 2018-02
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