As American middle-class parents consider their tax bill, there’s a tendency to wonder what exactly they get in exchange for the roughly $10,000 in personal taxes levied annually by the government. There’s the money. Where are the goods and services? Filled potholes and library books begin to answer that question, but a truly comprehensive answer is nearly impossible. Tracing dollars through the maze of the federal government is fool’s errand and it is, at times, not even clear whether that tax money finances in advance or retroactively. That means that there’s no way of knowing what percent of a family’s tax dollars are returned to them in the form of government spending on infrastructure, education or other services. The math on that fairness can’t be done.
But if taxpayers consider the system in a more holistic light and look over each others’ shoulders a little bit, they start to see a different picture. An alternative view of fairness comes into focus — one that is likely to leave middle-class parents furious. Where taxes benefit the poor and help the wealthy amass further riches, they do little to buoy those in the middle.
To be clear, all Americans are paying fewer federal taxes than they have in recent decades. Tax cuts authored by President George W. Bush were maintained by President Obama before President Trump’s 2017 Tax and Jobs Act further cut taxes. In total, all those cuts represent a $5.1 Trillion reduction in tax revenue. That’s a lot of money. And, specifically, that’s a lot of money for the wealthy.
“That’s $3.3 trillion for top 20 percent. of taxpayers,” explains Carl Davis, Research Director at the nonprofit Institute on Taxation and Economic Policy. “Within that group, it’s $1.9 trillion for top 5 percent and $1.1 trillion for top 1 percent alone.”
The fact that the wealthiest 20 percent of Americans have reaped 65 percent of the tax savings from these cuts doesn’t mean the American tax system isn’t progressive. Those who can afford to pay more do pay more. They just don’t pay a lot more. And what they get in return is profoundly and immensely valuable to them — potentially a steal at a much higher price.
“Consider Jeff Bezos,” Davis says, citing the world’s richest man and CEO of Amazon. “He’s managed to amass this enormous wealth partly because he’s been able to hire skilled talented employees that were educated in public universities and public education systems. And he’s shipping on public roads. And he’s able to enjoy the legal protections under the judicial system.”
Bezos is getting more out of his tax dollars than a family with two cars and no employees. And those billions he holds? Well, that wealth is not lifting up the middle class or increasing incomes. According to data from the Brookings Institute, a nonprofit policy think tank, earnings for the middle-class saw moderate income growth of just 40 percent between 1979 and 2014. Over the same period, the top 20 percent of earners saw their income increase 97 percent. So Bezos is getting better and better workers, not paying them more for their time despite cost-of-living increases, and overusing American infrastructure.
He may be a job creator, but that’s still a very good deal on taxes. And it gets better.
“We have a very weird tax system with lots of deductions and lower taxes on capital income as compared to earned income that are skewed regressively,” says Tax and Budget Analyst Hunter Blair of the nonprofit Economic Policy Institute. These are called “tax expenditures”, which essentially means the government is “spending” by not collecting taxes. For instance, the tax breaks for homeownership exceeds the entirety of spending by the Department of Housing and Urban Development. They are considered regressive because the benefit of tax expenditures are most often enjoyed by top earners more than lower income earners.
“So for the middle class, we shouldn’t be surprised that those regressive deductions aren’t doing as much as they could be,” Blair says. “The value of a deduction raises as your income tax bracket raises. It might help the upper-middle-class but it doesn’t do so in a helpful way.”
Under Trump, the wealthiest 20 percent who once had to pay estate tax on any wealth transfer of $5 Million have seen that threshold increase to $11 Million. That’s a $6 Million savings in the estate tax that will be invested and compounded. The wealth stays locked up. When a parent sees a modest bump in their paychecks thanks to a decrease in the income tax rate, that money isn’t saved or invested, it’s absorbed by costs: childcare, car repair, and healthcare. As Paul Ryan famously pointed out, that tax cut represents a CostCo membership. That’s about living, not about growing.
And as upper tax brackets pay less in taxes, there is less money for the federal government to spend on education and infrastructure. And indeed that has been the case, according to Blair federal infrastructure spending has been falling for decades. That means states have to step in. But states often fill funding gaps by gas taxes, sales taxes, or sin taxes. Those taxes are applied evenly regardless of income. That means a gas tax for infrastructure spending will affect lower income and middle-class parents trying to drive to work or get their kid to school for more than the wealthy parent for whom those taxes represent a smaller portion of their income.
In fact, regressive state taxes are enough of a burden that they can significantly dampen Americas otherwise progressive system. “I think especially during times of widening income inequality, it’s important to have a progressive system that asks more of people that can actually afford to pay more,” says Davis.
He notes that the biggest financial pressures fmiddle-classass families are child care, health care cost, and higher education. There are some policy solutions being floated for these issues in Washington, but progress seems unlikely in a partisan atmosphere and under an administration determined to shrink the federal footprint. With a declining tax revenue and a ballooning deficit, it’s simply not probable that this generation of politicians will be able to push for programs that provide middle class taxpayers with more value for their money.
So, how does the math work out? There are two ways of looking at it. Taxes are an impossible tangle and the return on investment is unknowable. Or, the middle class gets what’s left. That second view seems to be the more realistic.