The bottom 80 percent of Americans by income pay only 36 percent of all taxes, which means a tax cut won’t put a lot of money in their pockets, stoking their consumption and the overall economy. From Lance Roberts at realinvestmentadvice.com:
Last week, I did a fairly extensive analysis on the release of the 9-page “Trump Tax Cut” plan.
The most important aspect of that discussion was the difference between 1982, the last time there was permanent tax reform, as compared to today.
“Comparing Trump’s economic policy proposals to those of Ronald Reagan. For those that deem that bullish, we remind you that the economic environment and potential growth of 1982 was vastly different than it is today. Consider the following table:‘”
The differences between today’s economic and market environment could not be starker. The tailwinds provided by initial deregulation, consumer leveraging and declining interest rates and inflation provided huge tailwinds for corporate profitability growth.
Most importantly, when tax cuts were implemented in the mid-80’s, the U.S. economy was just coming out of back-t0-back recession versus being in the third longest economic expansion on record to date.
However, besides the fact the economic backdrop is diametrically opposed to what is was during the “Reagan years,” we also need to look at the backdrop of who actually pays taxes to begin with.
Who Pays Taxes
While the current tax plan has not defined actual income levels as of yet, we can make some assumptions from previous iterations of proposals. The entire premise behind the tax cuts is that it will unleash economic growth, generate millions of jobs, bring back manufacturing to America and lead to higher wage growth.
However, given that roughly 70% of economy is driven by personal consumption, the tax cuts will need to increase the amount of disposable incomes available to individuals to expand consumption further, thereby increasing overall economic growth.
So, here is the issue of tax cuts for the middle class. The chart below shows “who pays what in Federal taxes.”
Look at that chart closely.
- 50% of ALL taxes are paid by the top 10% of income earners.
- The other 50% of ALL taxes are paid by remaining 90%.
- The BOTTOM 80% only pay 36% of ALL taxes.
But it is even more glaring when we look at the taxes paid by just the top 20% of income earners.
To continue reading: Bull Trap: The False Promise Of Tax Cuts