The Tax Cuts and Jobs Act, a set of tax cuts Donald Trump signed into law during his first term as president, will expire on Dec. 31, 2024. As Trump and Republicans prepare to negotiate new tax cuts in 2025, it’s worth gleaning lessons from the president-elect’s first set of cuts.
The 2017 cuts were the most extensive revision to the Internal Revenue Code since the Ronald Reagan administration. The changes it imposed range from the tax that corporations pay on their foreign income to limits on the deductions individuals can take for their state and local tax payments.
Trump promised middle-class benefits at the time, but in practice more than 80% of the cuts went to corporations, tax partnerships and high-net-worth individuals. The cost to the U.S. deficit was huge − a total increase of US$1.9 trillion from 2018 to 2028, according to estimates from the Congressional Budget Office. The tax advantage to the middle class was small.
Advantages for Black Americans were smaller still. As a scholar of race and U.S. income taxation, I have analyzed the impact of Trump’s tax cuts. I found that the law has disadvantaged middle-income, low-income and Black taxpayers in several ways.
Cuts worsened disparities
These results are not new. They were present nearly 30 years ago when my colleague William Whitford and I used U.S. Census Bureau data to show that Black taxpayers paid more federal taxes than white taxpayers with the same income. In large part that’s because the legacy of slavery, Jim Crow and structural racism keeps Black people from owning homes.
The federal income tax is full of advantages for home ownership that many Black taxpayers are unable to reach. These benefits include the ability to deduct home mortgage interest and local property taxes, and the right to avoid taxes on up to $500,000 of profit on the sale of a home.
It’s harder for middle-class Black people to get a mortgage than it is for low-income white people. This is true even when Black Americans with high credit scores are compared with white Americans with low credit scores.
When Black people do get mortgages, they are charged higher rates than their white counterparts.
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Trump did not create these problems. But instead of closing these income and race disparities, his 2017 tax cuts made them worse.
Black taxpayers paid higher taxes than white taxpayers who matched them in income, employment, marriage and other significant factors.
Broken promises, broken trust
Fairness is an article of faith in American tax policy. A fair tax structure means that those earning similar incomes should pay similar taxes and stipulates that taxes should not increase income or wealth disparities.
Trump’s tax cuts contradict both principles.
Proponents of Trump’s cuts argued the corporate rate cut would trickle down to all Americans. This is a foundational belief of “supply side” economics, a philosophy that President Ronald Reagan made popular in the 1980s.
From the Reagan administration on, every tax cut for the rich has skewed to the wealthy.
Just like prior “trickle down” plans, Trump’s corporate tax cuts did not produce higher wages or increased household income. Instead, corporations used their extra cash to pay dividends to their shareholders and bonuses to their executives.
Over that same period, the bottom 90% of wage earners saw no gains in their real wages. Meanwhile, the AFL-CIO, a labor group, estimates that 51% of the corporate tax cuts went to business owners and 10% went to the top five highest-paid senior executives in each company. Fully 38% went to the top 10% of wage earners.
In other words, the income gap between wealthy Americans and everyone else has gotten much wider under Trump’s tax regime.
Stock market inequality
Trump’s tax cuts also increased income and wealth disparities by race because those corporate tax savings have gone primarily to wealthy shareholders rather than spreading throughout the population.
The reasons are simple. In the U.S., shareholders are mostly corporations, pension funds and wealthy individuals. And wealthy people in the U.S. are almost invariably white.
Sixty-six percent of white families own stocks, while less than 40% of Black families and less than 30% of Hispanic families do. Even when comparing Black and white families with the same income, the race gap in stock ownership remains.
These disparities stem from the same historical disadvantages that result in lower Black homeownership rates. Until the Civil War, virtually no Black person could own property or enter into a contract. After the Civil War, Black codes – laws that specifically controlled and oppressed Black people – forced free Black Americans to work as farmers or servants.
State prohibitions on Black people owning property, and public and private theft of Black-owned land, kept Black Americans from accumulating wealth.
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Health care hit
That said, the Trump tax cuts hurt low-income taxpayers of all races.
One way they did so was by abolishing the individual mandate requiring all Americans to have basic health insurance. The Affordable Care Act, passed under President Barack Obama, launched new, government-subsidized health plans and penalized people for not having health insurance.
Department of the Treasury data shows almost 50 million Americans were covered by the Affordable Care Act since 2014. After the individual mandate was revoked, between 3 million and 13 million fewer people purchased health insurance in 2020.
Ending the mandate triggered a large drop in health insurance coverage, and research shows it was primarily lower-income people who stopped buying subsidized insurance from the Obamacare exchanges. These are the same people who are the most vulnerable to financial disaster from unpaid medical bills.
Going without insurance hurt all low-income Americans. But studies suggest the drop in Black Americans’ coverage under Trump’s plan outpaced that of white Americans. The rate of uninsured Black Americans rose from 10.7% in 2016 to 11.5% in 2018, following the mandate’s repeal.
The consumer price index conundrum
The Trump tax cuts also altered how the Internal Revenue Service calculates inflation adjustments for over 60 different provisions. These include the earned income tax credit and the child tax credit – both of which provide cash to low-wage workers – and the wages that must pay Social Security taxes.
Previously, the IRS used the consumer price index for urban consumers, which tracks rising prices by comparing the cost of the same goods as they rise or fall, to calculate inflation. The government then used that inflation number to adjust Social Security payments and earned income tax credit eligibility. It used the same figure to set the amount of income that is taxed at a given rate.
The Trump tax cuts ordered the IRS to calculate inflation adjustments using the chained consumer price index for urban consumers instead.
The difference between these two indexes is that the second one assumes people substitute cheaper goods as prices rise. For example, the chained consumer price index assumes shoppers will buy pork instead of beef if beef prices go up, easing the impact of inflation on a family’s overall grocery prices.
The IRS makes smaller inflation adjustments based on that assumption. But low-income neighborhoods have less access to the kind of budget-friendly options envisioned by the chained consumer price index.
And since even middle-class Black people are more likely than poor white people to live in low-income neighborhoods, Black taxpayers have been hit harder by rising prices.
What cost $1 in 2018 now costs $1.26. That’s a painful hike that Black families are less able to avoid.
The imminent expiration of the Trump tax cuts gives the upcoming GOP-led Congress the opportunity to undertake a thorough reevaluation of their effects. By prioritizing policies that address the well-known disparities exacerbated by these recent tax changes, lawmakers can work toward a fairer tax system that helps all Americans.
Beverly Moran does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
