Two little-known ways GOP tax bill would make chasm between rich and poor even wider

The tax bill passed by the Senate in the wee hours of Dec. 2 will – if it becomes law – widen the gap between the rich and the poor at a time when income inequality is already approaching historic heights.

Initially, most U.S. households are likely to experience a modest tax cut under the Senate plan. However by 2027, the average family earning less than US$50,000 will pay about $250 more in taxes under the Senate plan, while the average family earning more than $1 million will experience a tax cut topping $8,000 a year, according to estimates from Congress’s own Joint Committee on Taxation.

Yet even those stark statistics understate the full impact of the Senate bill on long-term inequality in the United States.

In my own research, I examine the relationship between the tax system and inequality. In my view, there are two significant reasons why the bill’s impact will be even more dramatic – and even more regressive – than the Joint Committee on Taxation’s estimates suggest.

Painful triggers

First, under a 2010 law known as the Statutory Pay-As-You-Go Act, or PAYGO, the revenue losses resulting from the Senate bill would trigger automatic cuts in federal spending.

The program that would be most affected by the automatic cuts is Medicare, whose budget would be slashed by more than $25 billion a year. Other programs that would experience deep cuts include vocational training for individuals with disabilities, block grants for foster care and Meals on Wheels and federal funding for historically black colleges and universities.

Because lower- and middle-income families rely more heavily on these programs than wealthier Americans, these spending cuts would amplify the regressive consequences of the tax-side changes.

In theory, Congress could forestall these cuts by passing legislation that waives the PAYGO law. But such legislation would require 60 votes to overcome a Senate filibuster, and it is far from clear that the votes in favor of waiver are there.

And in any event, a PAYGO waiver would not change the fact that the tax bill increases the federal deficit by more than $1.4 trillion over the next decade. Spending cuts to social safety net programs would likely have to come at some point, and when they do, lower- and middle-income families are likely to bear the brunt.

Broadly similar legislation passed by the House last month would trigger automatic cuts as well. Because the House bill violates Senate procedural rules, the final legislation is likely to resemble the Senate’s package more closely than the House’s version.