Opinion: How the Trump tax cut law will hurt the working class

Yahoo

a day ago

Republican Sen. Lisa Murkowski of Alaska said it was 'agonizing' to vote for the tax cut bill President Trump signed on July 4. As details of the legislation come into focus, it's obvious why it might cause heartburn even for Republicans who passed it, with no Democratic votes.
The One Big Beautiful Bill Act, as the law is clumsily known, will literally make the rich better off and the poor worse off.
Some conservatives who want to pare the 'welfare state' may not care. But imposing austerity on millions of working-class voters is a stunning political risk for a party that is supposedly following President Trump's populist instincts.
The law has two main elements. The first is a sweeping series of tax cuts and tax cut extensions that will generally benefit everybody but add trillions of dollars to the national debt. The second is a set of benefit cuts that are meant to reduce the overall cost of the bill. Those will hit working-class Americans and make the net effect of the bill punishing to them.
The biggest part of the OBBBA is an extension of the tax cuts Trump signed into law in 2017. Those were due to expire at the end of this year. The OBBBA makes the current individual income tax rates permanent. Those are not 'tax cuts' per se, since tax rates will be the same in future years as they are in 2025. But the law does prevent what would have been a de facto tax hike if the 2017 rates expired and the higher 2016 rates went back into effect.
The law also includes some new tax breaks, such as the elimination of tax on income from tips and overtime pay, up to certain limits. There's also a new tax break for some seniors and a much higher cap for deducting state and local taxes, which will mostly benefit wealthy homeowners who itemize deductions on their tax returns.
The tax provisions generally benefit everybody, but the wealthy will gain the most. The average savings for all taxpayers will be about $2,900, compared with what the tax bill would have been if current rates expired, according to the Tax Policy Center. Those with incomes above $1 million would save nearly $60,000 on average. But the savings for workers with incomes below $30,000 would be less than $200 per year.
Those provisions, at least, do no harm to most taxpayers. But the harm arrives when factoring in cuts to Medicaid, subsidies for people to buy health insurance through the Affordable Care Act, and food aid known as SNAP. The healthcare cutbacks will leave an additional 16 million people without coverage by 2034, according to the Congressional Budget Office. Cutbacks to the SNAP program could reduce or eliminate food aid going to 22 million families, according to the Urban Institute.
Those changes will leave millions of Americans worse off. When accounting for the tax changes and benefit cuts combined, people in the lowest income quintile, with incomes below $13,500, will lose an average of $600 per year, according to the Yale Budget Lab. The next quintile will lose $65 per year. The healthcare and food aid cuts will have little impact on top earners, for obvious reasons. The top quintile will gain $6,500 in after-tax savings from all of the law's provisions, while the top 1% will net more than $30,000.
This is what economists call a 'regressive' policy change because the economic burden falls more heavily on those with lower incomes. 'The bill has four overriding characteristics,' Howard Gleckman of the Tax Policy Center wrote recently. 'It is regressive, expensive, complicated, and it treats people who make roughly the same amount of money in very different ways.'Tax cut defenders often point out that the wealthy typically get the biggest tax cuts because they pay the most taxes in the first place. That's generally true. But the wealthy are a distinct minority, which means a regressive law such as the OBBBA dis-serves millions of voters, and possibly a majority of them. The bottom two income quintiles, for instance, include roughly 92 million taxpaying units, whether singles, married couples, or other designations. There are only 26 million taxpaying units in the top quintile.
Maybe that's what Murkowski found so agonizing. 'Do I like this bill? No,' she told a reporter on July 2. 'I know in many parts of the country there are Americans that are not going to be advantaged by this bill.'
Trump can point to working-class provisions such as the elimination of taxes on tip income and overtime pay, with limitations based on the type of work and the amount of income. Some workers will in fact benefit from those carve-outs. But tax analysts argue that favoring certain types of work in that manner violates the principle of 'horizontal equity,' the idea that similar incomes should be taxed in similar ways.
To use the example of a restaurant, a waiter earning tip income would get a tax break that a cook paid hourly would not. That distorts the tax code, creates incentives to cheat, and generates legitimate grievances among the unlucky workers not gifted a tax break.
The OBBBA is already unpopular, with 64% of Americans disapproving and just 35% approving, in one poll. The real vote will come in the 2026 midterm elections, when Americans will express whether they feel better off or worse off under unified Republican control of government.
Getting Americans to like this law might be a more agonizing ideal than passing it.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Bluesky and X: @rickjnewman.
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