HomeBudget & Tax NewsCorrecting Biden on Tax Cuts

Correcting Biden on Tax Cuts

In his recent State of the Union speech, President Biden stated, “Unlike the $2 trillion tax cut passed in the previous administration that benefited the top 1 percent of Americans, the American Rescue Plan helped working people—and left no one behind.”

Excuse me? It’s true that the Trump tax cut benefited the top 1 percent of Americans. But it also helped Americans at all income levels. It helped in two ways. First, it cut taxes for virtually everyone and often by a lot. Second, the 2017 tax cut increased incentives to invest in more capital. With more capital to work with, workers were more productive and their higher productivity showed up in higher wages.

Strange as this might sound, President Biden lied.

It’s true that taxes were cut a lot for corporations and for high-income people. Any reasonable tax cut would necessarily cut taxes a lot for high-income people because they pay almost all the federal income taxes that are paid. According to the Tax Foundation, one of the most accurate measurers of taxes paid, the top 1 percent had a 1.5 percentage point decline in all their federal taxes, from 31.7 percent of income in 2017 to 30.2 percent of income in 2018. The bottom 20 percent had their average tax rate fall from 1.2 percent of income to barely above 0 percent.

How did low-income people get a tax cut? First, because the standard deduction was increased and second, because the child tax credit was increased.

The second way the tax cut helped everyone was by increasing the incentive to invest in capital. With more capital to work with, workers became more productive and earned more. Median wages in the third quarter of 2019 were 3.6 percent higher than a year earlier. This was well above the inflation rate in 2019, which was only 1.76 percent. What’s especially striking is how well workers at the bottom of the pay scale did. Median wages for full-time workers without a high school degree were a whopping 9.0 percent higher than a year earlier.

In his speech, President Biden used the term “trickle down” to refer to the idea that tax cuts on corporations and on the most productive people will help workers generally. Here’s the interesting thing about that term: no one who advocates such tax cuts uses the term “trickle down.” There’s an obvious reason why. Given how well tax cuts have worked, a much more accurate term is “gush down.”

Originally published by  Institute for Policy Innovation. Republished with permission.

David R. Henderson
David R. Henderson
David R. Henderson is an Emeritus Professor of Economics at the Naval Postgraduate School in Monterey, California, a Research Fellow with the Hoover Institution at Stanford University, and a Senior Fellow with Canada’s Fraser Institute.

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