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Americans paid almost $64 billion less in federal income taxes during the first year under the Republican tax overhaul signed into law in late 2017 by President Donald Trump, with some of the sharpest drops clustered among taxpayers earning between $25,000 and $100,000 a year, even as the overall number of refunds dropped during a turbulent tax season.
The data were released Monday, providing the first substantial look at the effects of a tax law that reduced rates for five of the seven income-tax brackets and also reduced the corporate income-tax rate. The 2017 law expanded certain credits and deductions while capping others, including a $10,000 state- and local tax-deduction limit, which, critics said, singled out residents of left-leaning states that happened to have higher local taxes.
The IRS data arrive as the 2020 presidential campaign intensifies and taxes shape up as an important campaign topic. Trump is of late pledging another tax cut, while Democratic candidates vow to increase taxes on the rich and corporations, who, they say, aren’t paying as much as they should, particularly after the Tax Cuts and Jobs Act, which was passed in 2017 without a single Democratic vote.
A MarketWatch analysis of IRS statistics — which shows tax-filing figures through late November 2019 — revealed:
• Americans had $1.552 trillion in tax liabilities last year, compared with $1.619 trillion in total tax liabilities at the same point a year prior. That’s a drop of 4% on a year-over-year basis.
• The double-digit percentage decreases in average tax liability started with a 12.5% drop for people making $15,000 to $20,000 a year. Double-digit percentage reductions in liability continued for people making $25,000 to $30,000 (down 11.2%) through $100,000 to $200,000 (down 10.96%).
• Taxpayers making between $40,000 and $50,000 a year had the largest fall in average tax liability, a 14.5% drop, while high-end households making between $250,000 and $500,000 had the second largest decrease, with a 14.4% liability reduction.
• Taxpayers making at least $1 million had a 4.3% decrease in average tax liability.
The overhaul may have been lightened tax burdens in the big picture, but that doesn’t mean it was a smooth ride for everyone:
• Almost 890,000 more returns showed taxes owed under the first year of the Trump tax cuts, the data show. At the same time, the sum total of those tax bills, $170 billion, was still $1 billion smaller than in the last year under the previous tax code.
• The IRS issued almost 2 million fewer refunds on a year-over-year basis, amounting to almost $360 million less in refunds.
A liability at tex time occurs when people don’t pay enough taxes throughout the year; if they’ve underpaid, the remainder comes due on April 15. If they’ve overpaid, the money comes back in the form of a refund.
Many taxpayers didn’t update their paycheck withholding levels to track the new rates last year, experts said. Likewise, the Government Accountability Office, a federal watchdog agency, cautioned more than 30 million people would have too little withheld in the tax cut’s first year.
Some accountants and tax-preparation companies, including H&R Block /zigman2/quotes/207406664/composite HRB +2.86% , arranged “empathy training” for preparers last year so they could walk clients through smaller refunds and unanticipated tax bills.
It has been hard for many to square perceptions about what the new law accomplished because of smaller than expected refunds, some observers have said.
Are the tax cuts working, or a ‘mixed record’?
The data, according to Treasury Secretary Steven Mnuchin, show the tax cuts were effective. Adjusted gross incomes were 5.7% higher in the November 2019 statistics than a year earlier, he emphasized. “President Trump’s pro-growth economic policies, including the Tax Cuts and Jobs Act, are working to increase wages and lower the tax burden for hardworking Americans,” Mnuchin said in a Monday statement.
‘The parts of the Trump tax cuts that really benefit the rich are not the personal-income-tax cuts but the corporate-income-tax cuts and estate-tax cuts.’
Mark Mazur, Urban-Brookings Tax Policy Center
Mark Mazur, director of the Urban-Brookings Tax Policy Center, said the tax-cut picture is more nuanced, with a “mixed record” so far.
The revised tax code is “not as tilted toward billionaires as some of the rhetoric may lead you to think, but it is the case the Tax Cuts and Jobs Act favored higher-income people,” he told MarketWatch.
For example, Mazur noted the sharp drop in liabilities for households making between $250,000 and $500,000 a year. Tax-code changes made it less likely these taxpayers would be subject to the alternative minimum tax, said Mazur.
Though taxpayers making this amount would typically be taxed at the 35% rate, the alternative minimum tax applies a lower rate of between 26% and 28% but with fewer available deductions, he noted.
Mazur said the law cut taxes for a lot of households, but added that it only provided a “boost for the economy in the short run” without strong wage increases or “huge bursts in investment in the U.S. from corporations.”
Focusing on personal taxes didn’t tell the whole story, according to Steve Wamhoff, director of federal tax policy at the progressive Institute on Taxation and Economic Policy, or ITEP.
“The parts of the Trump tax cuts that really benefit the rich are not the personal-income-tax cuts but the corporate-income-tax cuts and estate-tax cuts,” according to Wamhoff. Rule changes surrounding corporate taxes, “which mainly benefit the (mostly rich) people who own corporate stocks, and the estate-tax cuts, are the parts of the law that made it a good deal for the rich,” Wamhoff said.
Among other noteworthy provisions, the tax cuts reduced the corporate-income-tax rate to 21% from 35%. It also raised the exemption before an estate tax kicked in, going from $5.4 million to $11.4 million.
He added: “No one ever said that low- or middle-income people would get no benefits from the Trump tax law. What ITEP and others pointed out from the beginning was that the rich would get a disproportionate share of the benefits of the law and nothing in this data conflicts with that.”