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How Trump's long-promised middle class tax cuts might happen, despite deficits

Posted February 10, 2020 4:09 p.m. EST

— President Donald Trump has repeatedly promised middle class Americans fresh tax cuts if he wins a second four-year term in office in November, a pledge that might clash with his efforts to reduce yawning federal deficits.

Stephen Moore, an outside adviser who was floated last year for a seat on the Federal Reserve Board, told CNN that the administration is "homing in" on a proposal that would include lower rates for middle class families. Moore also floated the possibility of a savings account that would allow middle class Americans to save up to $10,000 tax-free.

White House spokesman Judd Deere said the administration "is studying numerous proposals that will benefit the middle class and the American worker and promote long-term economic growth."

But another tax cut by the Trump administration would only further widen the country's mounting deficit, which surpassed $1 trillion for the calendar year in 2019. It hasn't crossed that symbolic threshold since 2012 after the Obama administration and Congress approved stimulus funding in order to keep the economy afloat following the financial crisis.

The deficit is only expected to expand even further over the coming decade, reaching a total of $1.7 trillion in 2030, according to the latest projections by the nonpartisan Congressional Budget Office released in late January. The Trump administration's $4.8 trillion fiscal 2021 federal budget proposal released on Monday projected balancing the federal budget by 2035 based on rosy economic projections of 3% annual growth.

Trump didn't mention tax cuts in his State of the Union address last week or in his latest budget proposal, raising speculation by some analysts that the plan may have fallen from the administration's priorities.

"We get the sense that still another tax cut, for the middle class, has moved from the front burner to the back burner," Greg Valliere, chief US policy strategist for AGF Perspectives wrote in a note to clients.

Trump pledged a "giant" middle class tax cut in 2017, but under the final legislation passed that year by the Republican-controlled Congress richer households and corporations got bigger cuts than the average household, according to analysis by the Tax Policy Center, a nonpartisan think tank.

At this point, tax policy analysts agree on two things: any new plan by the President will be no more than a campaign document heading into 2020 and that Democrats have zero appetite for passing any law to benefit the middle class that would give the President a win before the November election.

Here's a look at what the White House could include in its plan:

Make 2017 cuts permanent

Many of the sweeping tax changes signed into law by the President in 2017 will expire for individuals and families in 2025. That means policy changes put into place will remain so for the foreseeable future. The downside political risk, however, is that the impact of the benefit wouldn't be immediate.

"Taxpayers also wouldn't notice any difference right now. They would only notice a difference relative to this hypothetical world in which the tax cuts were allowed to expire," said Kyle Pomerleau, a resident fellow at the American Enterprise Institute, a conservative think tank.

The other longer run economic risk, however, is that the country would run even larger deficits then already projected. The Congressional Budget Office recently updated their forecast, predicting that the country would amass trillion-dollar deficits for the next decade, ultimately reaching $1.7 trillion by 2030.

Tax credits

One way to help middle class Americans who aren't paying much income tax to begin with is through tax credits.

"There's almost no income tax to cut for a lot of households, so the only way to provide even more tax relief is to expand refundable tax credits for those households," said Pomerleau.

The Trump administration could consider expanding refundable credits -- like the child tax credit or the earned income tax credit -- to those particular families.

Some Republicans, particularly Sens. Marco Rubio of Florida and Mike Lee of Utah, advocated for expanding the earned income tax credit in the 2017 law, but those changes never made it into the final bill.

Howard Gleckman, a senior fellow in the Urban-Brookings Tax Policy Center at the Urban Institute, said it was a political miscalculation by the Trump administration not to have included it in the law.

"They could have done it and it would have gotten them a lot of credibility," said Gleckman. "It would have taken an issue away from Democrats in the upcoming election and they just didn't do it."

Some analysts expect the Trump administration is probably more likely to boost the child tax credit, which a few Democratic presidential candidates have also been in favor of. But that policy is likely to face some political opposition among certain factions of the Republican party, who believe everyone should pay at least some money to Uncle Sam.

Cut payroll taxes

Millions of American employees pay 6.2% of their salary in "payroll taxes," which chiefly funds social safety net programs such as Social Security and Medicare.

This past August, Trump suggested that he would consider providing a payroll tax cut for American workers but later waved off plans to do so in the near future.

The measure has been previously used by prior administrations during economic downturns. Former President Barack Obama, seeking reelection, signed a law in 2012 extending a payroll tax cut for workers and unemployment benefits as part of the administration's economic recovery plan following the financial crisis. And former President George W. Bush repeatedly provided a tax credits, deploying rebate checks of up to $600.

Changing tax brackets

Another option the administration could revisit is changing the federal government's tax brackets.

The 2017 tax law did eliminate some brackets, and as a result widened some others, but most of those changes impacted the country's highest income earners.

Any new changes could have only limited impact on the middle class, say tax policy analysts. For example, lowering a 24% rate down to 20% would unlikely directly target many middle class families that have a much lower tax liability already.

Tax policy analysts also argue the Trump administration could have seized the opportunity two years ago to make further adjustments, but ultimately didn't making them skeptical whether the White House would turn to it again as a potential tool.

"It's hard to imagine when it was all free money and they didn't do it then, they're going to do it now," said Gleckman.

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