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Why the GOP Tax Cut Will Make Wealth Inequality So Much Worse

The richest 1 percent now own 40 percent of the country's wealth. Under this bill, they’d own more.

House Majority Leader Kevin McCarthy and House Speaker Paul Ryan at a news conference following a vote on the GOP tax overhaul, in November (Susan Walsh / AP)

Within a week, Republicans will probably pass a corporate tax cut that is one of the most unpopular major pieces of legislation in modern American history. This is a rather curious distinction for a bill that cuts taxes for nearly every American family.

How can a trillion-dollar tax cut be so unpopular?

One possibility is that Americans don’t like the bill because they don’t understand what it does. More than half of Americans don’t think that the Republicans’ bill will reduce their taxes in 2018. That’s a striking statistic, since new research from the nonpartisan Tax Policy Center (TPC) finds that the vast majority of the country, including 90 percent of middle-class families, will get a tax break.

But another possibility is that Americans don’t like the tax bill because they understand exactly what it does. Most Americans seem to think that the GOP tax bill overwhelmingly benefits the rich at a moment when large corporations and affluent families don’t need much legislative assistance in their multi-decade dominion over the economy. In fact, the GOP tax bill does just that.

Why are Republicans doing this? First, it is conservative economic dogma that low taxes on the wealthy encourage business expansion and job creation, so that tax cuts for the penthouse “trickle down” to the lower floors of the economy, in the form of jobs and higher wages. Recent history has either punctured or demolished this point of view, as the Reagan and Bush tax cuts quite clearly failed to produce additional revenue or benefit middle-class wages. Second, as a practical matter, Republicans, like Democrats, need lots of money to run for office. But on the right, these funds are mostly supplied by a small base of corporate-libertarian donors, like the Koch brothers, who have for decades encouraged lawmakers to cut taxes and welfare spending to galvanize the economy. Republican politicians might prefer to support an unpopular bill, and risk losing some votes, than pass nothing and lose the critical donor support required to procure any votes.

The GOP tax bill operates by two simple principles. First, families at every income level can expect a tax cut—but the richer the family, the bigger the cut, both in absolute terms and in proportional income. Households making between $500,000 and $1 million would get a $21,000 tax cut in 2019 and their after-tax income would rise by 4.3 percent. That proportional gain is four times larger than the average after-tax benefit for a family making $40,000.

Second, as time goes by, most families’ tax benefits would shrink—with the major exception being the most affluent. Most of the plan’s individual tax cuts end after 2025. This provision is necessary (because of the procedure congressional Republicans chose for the bill) to pay for a permanent corporate tax cut whose benefits flow mostly through capital gains and dividends to shareholders. The bars below illustrate this effect:  The tax cuts shrink between 2018 and 2025 before disappearing for all levels in 2027—except for the richest households, the ones with the most money invested in stocks, who will still be reaping the benefits of lower corporate taxes.


The richest 1 percent now own 40 percent of the country’s wealth—their highest share in more than 60 years. Perhaps 40 percent seems like enough? Well, the GOP disagrees. In 2018, the 670,000 households earning more than $1 million a year will collectively benefit more from this bill than the 113 million families earning less than $75,000 (many of whom are, to be fair, pensioners who are earning little to no income).

How Families Benefit from the GOP Tax Bill: $75,000 vs. $1 Million
The Atlantic / TPC

Wealth inequality is a thorny problem. The rich have more money, which means they have more savings. When they invest those savings in stocks during a bull market, their wealth rises faster than the wages of the middle class. The richest 10 percent of U.S. families owns 80 percent of all publicly traded stock, while more than half of Americans don’t have one dollar in a 401(k).

The Great Recession exacerbated the wealth gap by striking at the heart of middle-class assets—the housing market—while the post-recession recovery in equities benefited the core of upper-class wealth—investments. Today, the median American household is poorer than it was before the housing crash, while the richest households are much richer, thanks to the remarkable rally in equity prices since 2009. That explains the sharp divergence in the net worth of households since the Great Recession visible in the chart below. Families at the 25th percentile have scarcely recovered since the Great Recession while households at the 90th, 95th, and 99th percentiles have all exceeded their pre-recession highs.

WSJ (Data: Credit Suisse, Federal Reserve)

The last few decades have been an extraordinary time for income and wealth inequality. This bill is an extraordinary inequality accelerant that may do very little for growth. Economists know it. Judging by its approval rating, Americans know it, too.