Federal Tax Reform Helps Middle-Class Families

Lancaster County residents are no strangers to hard work. For centuries, the entrepreneurship of area residents has not only built and sustained communities but also drawn visitors and businesses to the region. 

But right now, hardworking families in the area are burdened by an onerous federal tax structure that hinders rather than promotes economic growth and prosperity. That’s why Congress is working to overhaul the broken tax code and deliver tax relief and greater economic opportunity to middle-class families and businesses.

Unfortunately, critics of this much-needed reform have taken aim at its supporters. Instead of recognizing that tax reform will return more money to working Pennsylvanians’ pockets while spurring job creation and economic growth, some detractors have panned the reform effort as a giveaway to the rich and corporations. Some have even latched on to the debunked claim that the average middle-class American would see a tax hike under the proposed reform.

But let’s look at the facts.

As Congressman Lloyd Smucker rightly notes, under the House’s tax reform a family of four earning $59,000 would keep an additional $1,182 of their income. In other words, their taxes would drop from $1,582 to $400, a tax cut of nearly 75 percent. This is money families can save, invest or spend in their local communities.

The region’s small businesses—the lifeblood of the state’s economy—would also see tax relief. Under both the House and Senate plans, small businesses that “pass through” business income to their owners would receive a substantial tax cut.

Additionally, Lancaster County residents would benefit from other elements of the reform, including a much-needed reduction in the corporate income tax rate to make our rate competitive with international rates. This long-overdue reform would decrease the incentive for businesses to relocate overseas — keeping more family-sustaining jobs within U.S. borders.

Let’s keep in mind that Pennsylvania’s corporate income tax is the highest effective rate in the nation, while the federal tax rate is now the highest among industrialized countries. In other words, Pennsylvania has the highest corporate taxes in the world. No wonder the state is struggling with job creation.

Reducing the corporate tax rate would lead to job growth and higher wages. Research shows that corporate taxes tend to get paid by labor, not corporate shareholders, in the form of lower wages. The White House has noted that lowering the corporate tax rate would increase annual income by $4,000, a number many experts have argued underestimates the full benefits.

Given these outcomes, it’s hardly surprising that for years politicians and economists from across the ideological spectrum have supported lowering the corporate tax rate.

Tax cuts aside, simplifying the code presents its own challenges. Some have expressed concern about eliminating popular deductions. Yet most of these deductions tend to benefit upper-income earners while providing little, if anything, for middle-class families.

For example, the House and Senate bills each eliminate or scale back the state and local tax (SALT) deduction. In tax year 2015, 91 percent of the benefits of this deduction went to taxpayers with an adjusted gross income (AGI) of $75,000 or more, while less than 1 percent went to taxpayers with an AGI of less than $30,000. Meanwhile, both the House and Senate tax bills retain the portion of the SALT deduction that benefits middle-class taxpayers most, the property tax deduction (capped at $10,000 to prevent benefits from skewing toward the rich).

Eliminating selective deductions means the standard deduction can be doubled. Under the tax reform plan, an estimated 94 percent of Americans will claim the standard deduction rather than itemizing — a simplification that will save Americans time and money.

Last year, approximately 94 percent of individual taxpayers and 85 percent of small businesses paid a professional tax preparer or online service to file their taxes for them. A study by National Taxpayers Union Foundation placed the cost of tax code compliance to the economy at an astounding $262.2 billion last year alone.

Smucker and his colleagues in Congress are right to support a plan that will let middle-class Pennsylvanians keep more of their hard-earned money, raise wages, simplify the tax process and encourage entrepreneurship.

Pennsylvanians deserve a tax structure that respects their hard work and empowers them to continue building strong communities. Reforming the tax code is a major step toward this worthy goal.


Pete Sepp is president of the National Taxpayers Union, based in Washington, D.C. Charles Mitchell is president and CEO of the Commonwealth Foundation, Pennsylvania’s free-market think tank.