IF President Donald Trump and congressional Republicans end up paying for their proposed $1.4 trillion tax cut by reducing spending or raising taxes later on, most Americans making less than $86,000 would be worse off, according to a new report by the Tax Policy Centre, a nonpartisan think tank.

Republicans have yet to say how they intend to pay for the tax cut. Originally, Treasury Secretary Steven Mnuchin argued the tax cut would completely pay for itself because the economy would grow substantially faster, a claim that has not been backed up by independent research. Congress’ official scorekeepers estimate that the tax cut would add $1tr to the federal deficit, even after taking into account some additional economic growth.

At some point, that will have to be paid for, and top Republican lawmakers, including Trump and House Speaker Paul Ryan, R-Wis., have indicated they plan to take a hard look at welfare spending and other safety net programs for potential trimming.

The Tax Policy Centre warns in its “Winners and Losers” report released Friday that paying for the tax cut by reducing programs that help the poor and lower middle class would leave many Americans in the bottom 60 per cent in a worse spot than they would have been without the GOP tax bill.

“Our central finding is that if either bill as written were to become law and plausible ways of financing the bill were taken into account, a significant majority of low and middle income households will eventually end up worse off than if the bill did not become law,” the researchers wrote. “In other words, they will lose more from the financing mechanisms than they will gain from the tax cuts themselves.”

The House and Senate have both passed tax bills, and a Conference Committee is beginning to meet to hammer out a final plan that both chambers can agree on and send to Trump’s desk by Christmas. The House bill would cut taxes for 76pc of Americans next year and raise taxes on just 7pc, according to the Tax Policy Centre. But those numbers look substantially different once the think tank factored in how to pay for the bill.

If every household were required to pay the same amount to fund the tax cuts — roughly $1,200 — in 2018, then only 27pc of Americans would get a cut and 73pc of Americans would essentially be getting a tax hike. The vast majority of the families that would be worse off would be in the low and middle class.

Critics of the report say the Tax Policy Centre is running hypothetical scenarios. There are no proposals on the table to make draconian cuts or to make every American pay a fee or tax.

“One of their major assumptions was that if you took the debt and spread it across households equally, then yes it will be extremely regressive, but that’s never going to happen,” says Gavin Ekins, a research economist at the Tax Foundation, which supports the bill.

But the Tax Policy Centre says this is actually a pretty similar scenario to what the Trump budget proposed earlier this year with its cuts to various welfare and safety net programs that mostly impact moderate-income households. The Tax Policy Centre is also assuming a modest increase on higher-income households.

“What Republicans have been talking about with cuts to Medicare, Social Security and Medicaid in recent days is actually going to be more regressive than our scenario,” says William Gale, co-director of Tax Policy Centre and a senior economist under President George H.W. Bush. “Those cuts won’t affect the top 20pc very much.”

Another option is to have every household pay the same percentage of their income to fund the tax cut. The Tax Policy Centre says that would require a 1.6pc fee on every household, which works out to a family making $75,000 a year paying $1,200 next year. Wealthier families would pay a higher dollar figure and poorer families would pay a lower dollar amount. This scenario results in a similar situation, where the bottom 60pc end up losers and only the top 40pc are winners.

The final scenario the Tax Policy Centre considered is an across-the-board tax increase that is proportional to each family’s taxable income. So families that don’t make any money would not be required to pay and families that make a lot of money would be required to fund the bulk of it. Under this scenario, most people making less than about $216,000 are winners, while millionaires are net losers. In total, 65pc of Americans would get a net tax cut, while just 19pc would pay more.

The three scenarios produced similar results for the Senate tax bill. “These results emphasize that there are no free lunches in tax reform,” the authors concluded.

But critics say the whole point of the bill is to stimulate growth in the coming years and Republicans are unlikely to do anything that hurts the economy such as fees or reductions in government spending that hit the middle class. White House economic adviser Gary Cohn told Fox News Friday that “with the tax plan we’re going to easily see 4pc growth next year.”

Ekins, the senior economists at the Tax Foundation, also points out that much of America’s $20tr debt was accumulated in the past decade. It’s not as if the tax bill is creating the debt problem. If anything, he says the tax bill might help make the situation better in the next year or two because it is expected to boost growth, which should make America’s debt-to-GDP ratio — the metric most on Wall Street and around the world care about — look smaller.

But Ekins agrees that how the budget is adjusted down the road will matter. He points out that proposals to reduce military spending and top stop wealthy Americans from collecting Social Security and Medicare would be very progressive.

Bloomberg/The Washington Post Service

Published in Dawn, The Business and Finance Weekly, December 11th, 2017