Tax cuts are no substitute for pay raises

Evan Vucci/Associated Press

President Trump displayed the tax overhaul package after signing it.

By Evan Horowitz Globe Staff 

It’s more than a new year, it’s a whole new regime for employers and workers, who have to make sense of the major tax changes Congress passed in December.

Starting in February, most workers will see a much-appreciated bump in their paychecks as a result of these tax cuts. But over time those benefits will shrink, and after eight years they’ll disappear, when key provisions expire.


And that helps drive home a key point: Tax cuts are a poor substitute for raises.

Let’s imagine ourselves as a typical breadwinner in Massachusetts, with a salary of about $80,000. Under the old tax system, we could expect to keep about $55,000, after accounting for local, state, and federal taxes.

Under the new law, though, our take-home pay jumps to $56,000, an increase of about 1.8 percent, according to calculations from the nonpartisan Tax Policy Center. That’s not nothing — who would turn down an extra $1,000? — but it’s probably not life-altering, either.

Especially when you consider this won’t be the only change in our paychecks.

Lots of us will also see our health insurance premiums go up. In recent years, employee premiums have been steadily rising all over the country, enough to cut our take-home pay by roughly $200, which would wipe out a chunk of the expected tax benefit.


Then there’s the question of whether we get a raise this year. When the economy is growing and the labor market is tight — as ours has been for years now — average wages should be increasing around 3.5 percent per year.

Unfortunately, typical workers haven’t been seeing these gains. Instead, wages have been growing between 2 and 2.5 percent per year. That means such workers as us — typical breadwinners in Massachusetts — are getting raises worth $1,300 instead of $2,000, after taxes.

Taken at face value, that missing $700 seems to be more than compensated for by the $1,000 tax break. But there’s a big difference here: Wage growth compounds. Raises happen every year, so we wouldn’t just get that extra $700 this year but a $1,400 boost the next year, and so on.

If we could get wages growing robustly again, our take-home pay in 2025 would be as much as $5,000 higher.

Tax cuts don’t work like this.

By 2025, our $1,000 pay bump is actually slated to shrink to around $700. There’s no compounding, as you have with wages.


And several of the biggest benefits for middle-income families — including the greatly expanded child tax credit and the larger standard deduction — are tied to a new, slower-growing inflation adjuster, so they won’t keep up with costs quite as well.

Then, come 2026, even this modest tax benefit may disappear, because many of the most worker-friendly elements are set to expire — unless a future Congress extends them.

The takeaway here isn’t really about the limited impact of the Republican tax plan, only its limited effect on middle-income workers. For corporations and big investors, the benefits are much larger, and they don’t expire.

But for people who earn paychecks — rather than profits — this doesn’t help much. They may, over time, be able to bargain for a share of the corporate gains, but the estimates used above already try to account for this trickle-down effect.

In the new post-tax-cut world, the biggest issue for workers’ welfare hasn’t really changed: It isn’t so much what the federal government does to provide tax cuts, but what employers deliver in terms of rising wages.

Evan Horowitz digs through data to find information that illuminates the policy issues facing Massachusetts and the nation He can be reached at
Follow him on Twitter @GlobeHorowitz.