Early in his tenure, Treasury Secretary Steven Mnuchin boldly promised that tax reform would not cut taxes for the rich—a promise he has since “walked back.” Recently, Speaker Nancy Pelosi has laced the upcoming debt limit debate with assertions that House Democrats will not support a debt limit increase that permits tax cuts for the rich.
While both statements play well in the media, neither will be easy to deliver on because higher-income Americans in the top quintile pay almost 90 percent of all individual income taxes. It is worth noting that the lower end of the top quintile threshold begins at $83,000 for a single person household up to about $166,000 for a four-person household as of 2013.
Inherent in the “tax the rich” argument is the idea that as one gets wealthier, tax burdens decline because income shifts from wages and asset income to lower tax-rate capital gains. However, data from the Congressional Budget Office illustrates the extent to which higher-income households in the United States contribute disproportionately to overall federal income tax revenues (Chart 1).
The top 20 percent of households by income dominate as contributors to federal income tax revenues. The bottom 40 percent pay little or no individual income taxes as a result of various tax preferences like the Earned Income Tax Credit and/or the Child Credit.
Legislators will consequently find it increasingly difficult to cut taxes without cutting them for the rich. The growth in sole proprietorships and other business forms that record their business income as part of their individual tax returns further complicates the task because lowering tax rates on businesses creates incentives for business growth and jobs. (See The Business of America is Business.)
One possible way out of this conundrum is to impose the standard that individual tax reform proposals should not make the after-tax income distribution more unequal than it is today. Whether by explicit intention or accident, U.S. tax policy has kept after-tax shares of income relatively constant over time, especially since the late 1990s (Chart 2).
Along with the existing progressive tax structure, tax cuts for lower-income brackets have served to relieve the pressures of the social insurance tax, as have various tax credits. The House Republican tax bill largely keeps the current after-tax income distribution intact for all but the top 1 percent. Making capital gains treatment less generous would be one option that would reduce the benefits of tax reform for the top 1 percent.
There remain big battles to be fought on the tax reform front. Still, the reality is that the largest dollar benefits will have to go to the top income brackets because they pay the most taxes — even keeping the after-tax income distribution where it is today.
 Burman, Leonard E., James R. Nunns, Benjamin R. Page, Jeffrey Rohaly, and Joseph Rosenberg. “An Analysis of the House GOP Tax Plan.” Tax Policy Center. Urban Institute, Brookings Institution, April 5, 2017. Web.
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