How Donald Trump’s Tax Cuts Helped the Middle Class

One of President Donald Trump’s signature legislative achievements was the Tax Cuts and Jobs Act passed in 2017. Trump and Republicans frequently claimed the tax overhaul provided major middle class tax relief. Critics argue the benefits skewed heavily toward corporations and the wealthy. Two years removed, analyzing the data provides perspective on how the law impacted middle income earners.

Introduction

Donald Trump campaigned heavily in 2016 on a promise to reform taxes to benefit middle class Americans. With Republican control of Congress, he passed the most sweeping tax overhaul since 1986 early in his presidency.

The Tax Cuts and Jobs Act made changes across the board, including:

• Cutting income tax rates across brackets, but expiring cuts for individuals in 2025.
• Nearly doubling the standard income tax deduction.
• Eliminating personal exemptions for dependents.
• Expanding child tax credits.
• Lifting caps on state and local income tax (SALT) deductions.

This complex mix of provisions resulted in simplification for some taxpayers, but fluctuations in savings for different income tiers based on deductions utilized. As the law’s impacts settle, the key question remains – did it ultimately live up to touted middle class benefits?

Defining the Middle Class

To evaluate middle class impacts, we must first define what income ranges constitute middle class. Typical definitions center around median household income:

• In 2017, U.S. median income was $61,372. Median means half of households were above and below this level [1].
• Looking at data, a reasonable range capturing middle class households is $40,000 to $100,000 annually [2].
• This spans working and middle-middle class families from service sector employees to managers and skilled trades.
• The tier just above, $100,000-$350,000, includes more upper-middle class professional households [3].

For the purposes of this analysis, we will define the $40,000 to $100,000 income range as our middle class bracket.

Tax Savings in 2018 Under TCJA

In the first year following implementation in 2018, the Tax Policy Center estimated the household tax changes across income tiers [4]:

• Those making $40-50k saw an average cut of $800, or 1.4% of after-tax income.
• The $50-75k bracket saved around $1,090, or 1.8% of after-tax income.
• Those from $75-100k saved $1,500 on average or 2.0% of their after-tax income.
• The top 5% making over $500k saved over $11,000 or 3.4% of income.

So the bill delivered noticeable but relatively modest relief across middle class brackets compared to top earners in raw dollar terms.

Impact on Specific Middle Class Families

Drilling down into hypothetical example households shows the law’s effects [5]:

• A married couple making $75,000 with 2 kids saw taxes fall from $6,328 to $4,019.
• A single parent with a $40k income and 1 child had taxes drop from $3,447 to $1,249.
• However, a married couple making $85k but not owning a home saw a slight tax increase from $7,632 to $7,897.

Situations benefiting from child tax credits and lower marginal rates generally did better, while some itemizers without kids saw smaller gains or breaks even.

Temporary vs. Permanent Provisions

Most individual tax cuts phase out by 2025, while corporate cuts were made permanent [6]:

• Individual changes like lower rates and higher deductions end in 2025.
• The enlarged child tax credit and estate tax exemption also begin phasing down that year.
• But cuts to corporate tax rates from 35% down to 21% do not expire.

This means the law skews to favoring corporations long-term, while providing short-term relief for many middle class taxpayers.

Winners and Losers

The mix of temporary and permanent changes produced clear winners and losers [7]:

Winners

• Large corporations
• Wealthy individuals
• Businesses owners and partners
• Families with multiple children

Potential Losers

• Middle class itemizers losing SALT deductions
• Single adults without children
• College students losing exemptions for dependents
• Senior citizens as tax brackets change

For some demographics like larger families and business owners, benefits clearly outweighed costs. But the equation was less definitive for other middle income earners.

Did the Tax Cuts Pay for Themselves Through Growth?

A key promise was tax cuts would spur enough growth through business investment to offset lost revenue. This did not materialize:

• GDP growth increased modestly in 2018 but then declined in 2019 rather than accelerating [8].
• Total tax revenues as a share of GDP declined only slightly, indicating minimal broader growth impacts [9].
• The total federal deficit ballooned from $779 billion in 2018 to $984 billion in 2019 as growth failed to make up for tax losses [10].

The evidence does not support major long-term growth effects paying for the tax cuts.

Conclusion

On balance, it appears the middle class saw meaningful but uneven and modestly-sized financial benefits from Trump’s tax overhaul, but likely less than higher earners. For some demographics like families with children under 17, gains were clearest.

But for others, like higher-income itemizers in high-tax states, benefits proved negligible or negative. With tax changes expiring in a few years, the long-term advantage for the middle class versus corporations remains questionable. While providing some relief in the short-term, the Tax Cuts and Jobs Act ultimately seemed to overpromise on lasting transformative middle class savings.

References

[1] https://www.census.gov/library/publications/2018/demo/p60-263.html [2] https://www.pewresearch.org/fact-tank/2020/07/23/are-you-in-the-american-middle-class/ [3] https://www.investopedia.com/financial-edge/0912/which-income-class-are-you.aspx [4] https://www.taxpolicycenter.org/publications/distributional-analysis-conference-agreement-tax-cuts-and-jobs-act/full [5] https://budgetmodel.wharton.upenn.edu/issues/2018/3/29/the-effects-of-the-tcja-by-income-group [6] https://www.investopedia.com/taxes/trumps-tax-reform-plan-explained/#those-who-benefit [7] https://budgetmodel.wharton.upenn.edu/issues/2020/8/21/the-tax-cuts-and-jobs-act-3-years-later-effect-on-federal-revenue [8] https://www.thebalance.com/us-gdp-by-year-3305543 [9] https://www.taxpolicycenter.org/statistics/amount-revenue-source [10] https://datalab.usaspending.gov/americas-finance-guide/deficit/trends/ [11] https://budgetmodel.wharton.upenn.edu/issues/2020/8/21/the-tax-cuts-and-jobs-act-3-years-later-effect-on-federal-revenue