By Andrew Keshner & Katie Marriner
Americans paid almost $64 billion less in federal income taxes during the first year under the Republican tax overhaul signed into law in late 2017 by President Donald Trump, with some of the sharpest drops clustered among taxpayers earning between $25,000 and $100,000 a year, even as the overall number of refunds dropped. That’s according to Internal Revenue Service data released this week, giving the most up-to-date look yet at how people fared at tax time in the first year of the Tax Cuts and Jobs Act.
The IRS data arrive as the 2020 presidential campaign intensifies and taxes shape up as an important campaign topic.
The data were released Monday, providing the first substantial look at the effects of a tax law that reduced rates for 5-of-the-7 income-tax brackets, and also reduced the corporate income-tax rate.
The 2017 law expanded certain credits and deductions while capping others, including a $10,000 state- and local tax-deduction limit, which, critics said, singled out residents of left-leaning states that happened to have higher local taxes.
Trump is of late pledging another tax cut, while Democratic candidates vow to increase taxes on the rich and corporations, who, they say, aren’t paying as much as they should, particularly after the Tax Cuts and Jobs Act, which was passed in 2017 without a single Democratic vote.
A MarketWatch analysis of IRS statistics — which shows tax-filing figures through late November 2019 — revealed:
- Taxpayers making between $40,000 and $50,000 a year had the largest fall in average tax liability, a 14.5% drop, while high-end households making between $250,000 and $500,000 had the second largest decrease, with a 14.4% liability reduction.
- Americans had $1.552 trillion in tax liabilities last year, compared with $1.619 trillion in total tax liabilities at the same point a year prior. That’s a drop of 4% on a year-over-year basis.
- The double-digit percentage decreases in average tax liability started with a 12.5% drop for people making $15,000 to $20,000 a year. Double-digit percentage reductions in liability continued for people making $25,000 to $30,000 (down 11.2%) through $100,000 to $200,000 (down 10.96%).
- Taxpayers making at least $1 million had a 4.3% decrease in average tax liability.
- Almost 890,000 more returns showed taxes owed under the first year of the Trump tax cuts, the data show.
- The sum total of those tax bills, $170 billion, was still $1 billion smaller than in the last year under the previous tax code.
- The IRS issued almost 2 million fewer refunds on a year-over-year basis, amounting to almost $360 million less in refunds.
Many taxpayers didn’t update their paycheck withholding levels to track the new rates last year, experts said. Likewise, the Government Accountability Office, a federal watchdog agency, cautioned more than 30 million people would have too little withheld in the tax cut’s first year.
Some accountants and tax-preparation companies, including H&R Block HRB, -5.03%, arranged “empathy training” for preparers last year so they could walk clients through smaller refunds and unanticipated tax bills.
It has been hard for many to square perceptions about what the new law accomplished because of smaller than expected refunds, some observers have said.
Are the Tax Cuts Working, or a ‘Mixed Record’?
The data, according to Treasury Secretary Steven Mnuchin, show the tax cuts were effective. Adjusted gross incomes were 5.7% higher in the November 2019 statistics than a year earlier, he emphasized.
“President Trump’s pro-growth economic policies, including the Tax Cuts and Jobs Act, are working to increase wages and lower the tax burden for hardworking Americans,” Mnuchin said in a Monday statement.
Mark Mazur, director of the Urban-Brookings Tax Policy Center, said the tax-cut picture is more nuanced, with a “mixed record” so far.
The revised tax code is “not as tilted toward billionaires as some of the rhetoric may lead you to think, but it is the case the Tax Cuts and Jobs Act favored higher-income people,” he told MarketWatch.
For example, Mazur noted the sharp drop in liabilities for households making between $250,000 and $500,000 a year. Tax-code changes made it less likely these taxpayers would be subject to the alternative minimum tax, said Mazur.
Though taxpayers making this amount would typically be taxed at the 35% rate, the alternative minimum tax applies a lower rate of between 26% and 28% but with fewer available deductions, he noted.
Mazur said the law cut taxes for a lot of households.
Among other noteworthy provisions, the tax cuts reduced the corporate-income-tax rate to 21% from 35%. It also raised the exemption before an estate tax kicked in, going from $5.4 million to $11.4 million.
Andrew Keshner is a personal finance reporter based in New York. Katie Marriner is MarketWatch's interactives editor. Follow her on Twitter @kemarriner.