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With great fanfare Congress just passed a bill to cut taxes by more than $1 trillion over the next decade, and by nearly $220 billion in fiscal 2019 alone. But will regular taxpayers notice? To get an idea, I looked at our experience with past tax cuts and, this being 2018, asked my friends on Facebook.
Just over a year ago, I asked a few dozen of them whether they’d trade more federal debt for a tax cut. Fourteen responded, and used TPC’s 2016 election tax calculator to get a sense of what a Trump tax plan might look like. Some said they’d save any tax cut they received, others said they’d buy new shoes or travel. At least one didn’t think he’d notice. Most felt a tax cut was not worth increasing the federal debt.
What do my Facebook friends think now that the tax cut is a reality? Will they notice a modest reduction in federal income tax withheld from their paycheck? If they do—what will they do with the extra money?
Before we get to the results, here is a bit of important background:
The Tax Cuts and Jobs Act (TCJA) will deliver modest tax cuts to middle-income people, at least at first. The Tax Policy Center estimates that the average tax cut for all households in 2018 will be about $1,200. For middle-income households, the average is about $900.
Averages, as ever, can be misleading. As my colleague, Howard Gleckman, notes, the change in tax liabilities caused by the TCJA will depend on several idiosyncratic factors—size and composition of family, amount and source of earnings, and place of residence, among others. TPC case studies show that a married couple with adjusted gross income (AGI) of $75,000 and two young children will get a tax cut of $2,116 per year, or about $177 a month. A household with the same AGI but with two older kids will get a tax cut only half as large. An unmarried worker with $30,000 in AGI and no children will get an annual tax cut of $457, or a monthly tax cut of $38.
The White House argues that corporate tax cuts will boost workers’ wages. But even some Administration officials concede that it will take time before corporate tax cuts result in higher pay for ordinary workers.
Also worth remembering: Many higher-income households will see an increase in after-tax income thanks in part to corporate tax rate cuts and lower taxes on their own business income from partnerships and the like. However, they won’t see those benefits in the form of lower withholding and higher take-home pay.
But the rest of us may see our taxes withheld shrink. The questions are: Will we notice? And what will we do with the extra cash? The answers matter for two reasons: Politically, voters will be more supportive of the tax cuts if they see direct benefits in their paychecks. And the immediate economic boost that President Trump expects will occur only if the tax cuts boost demand.
The last time I recall getting a big tax cut, it was in a lump sum. Remember those tax rebates direct deposited by the US Treasury in 2008? We put that extra few hundred dollars straight into to our children’s savings accounts.
But we may have been unusual. Studies of past tax cuts show that the way they were delivered could affect consumer behavior. However, the studies have produced inconsistent results. Some research shows that people were more likely to spend if they got a relatively small bump in take-home pay that they spent without really noticing the increase.
But University of Michigan economists Matthew Shapiro and Joel Slemrod found that people may be more likely to spend more visible rebates than small increases in take-home pay.
In one survey, Shapiro and Slemrod found that only one in five said the 2008 tax rebate would prompt them to spend more. About a third planned to save the rebate, while nearly half planned to pay off debt.
But in another paper, they compared consumer behavior after getting their 2008 rebates with their reported response to a 2009 tax cut, where income tax withholding was reduced for working families to reflect a new tax credit while retirees received a one-time payment. The results: Households reported that they were more likely to spend the rebate than the small amounts of extra cash that appeared in their pay checks.
What will happen in 2018? Will taxpayers really “see” any extra money—especially if increases in after-tax income are directly deposited into their checking accounts? In 2016, according to the Electronic Payments Association, 82 percent of US workers receive their earnings through Direct Deposit. Do they read those electronic pay stubs?
In a very informal and unscientific survey, I asked my Facebook friends whether they review their pay stub with each direct deposit. Of 23 respondents, 60 percent said they did not.
Then, I invited them to use TPC’s new TCJA tax calculator to estimate what their 2018 tax bill will look like and asked what they’d likely do with any extra cash.
Of 12 friends who used the calculator, nobody reported a plan to increase their spending.
Six said they’d save their tax cut. Five said they’d pay a bill to cover previous amounts spent. One, who lives with her spouse and two older children in a high-tax state, was not happy to learn that her tax bill will go up. Another said, “I don't need to save $75 per month if it means billionaires get humongous tax breaks and the poorest pay more…”
One more complication: The TCJA tax cut won’t be the only thing affecting a worker’s take-home pay this year. Employer-sponsored health insurance premiums—also withheld from pay checks—will likely climb. For some, a higher monthly premium could offset their tax cut.
If my friends are any guide, taxpayers might notice the TCJA tax cut. But they might not rush out to spend it. And for all the fanfare surrounding its passage last month, the cut might not make much of a difference in the lives of those who could most use the money.
The Tax Hound, publishing the first Wednesday of every month, helps make sense of tax policy for those outside the tax world and connects tax issues to everyday concerns. Need help or have an idea? Post a comment, or send Renu an email.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.
Jose Luis Magana/AP Photo