I wanted to touch on a few items in the recently-announced framework for tax "reform" from President Trump and the GOP Congress.
And I want to start with explaining where things are, and where this might take us.
Today, different tax brackets kick in at a number of income levels, ranging from 10% on the first $9,325 of taxable income, to the 39.6% bracket that kicks in at $418,400 (this chart from the Tax Foundation gives a good explanation of where the 7 tax rates take effect).
If you look at the 9-page outline released by the Trump Administration and the GOP Congress,
the idea is to lower the amount of tax brackets, and the 39.6% top rate will go down.
Under current law, taxable income is subject to seven tax brackets. The framework aims to consolidate the current seven tax brackets into three brackets of 12%, 25% and 35%.
The framework gives no information at what income levels the 3 brackets would kick in, and gives a vague reference of “a more accurate measure of inﬂation” being a means of indexing the cutoff points for those brackets. Neither of those things are very reassuring.
There does seem to be some attempt to spread around the tax cut to non-rich Americans, in the form of a higher standard deduction and an expansion of the child tax credit. There also is reference to “a non-refundable credit of $500 for non-child dependents to help defray the cost of caring for other dependents,” which seems to lean toward helping individual take care of other family members.
But then you see typical GOP garbage like the removal of the estate tax, and you realize that it is mere window dressing. As has been mentioned before, you need to be inheriting a shitload in order to even qualify for the estate tax (the 2017 limit is just under $5.5 million a person,
or $11 million for a couple). This means that the estate tax effects around 1 in 500 Americans,
and when you consider that this deals with assets above that $11 million that have never been “cashed in” (and forced to pay tax when sold), that sure sounds like special interest bullshit to me.
Another awful about this tax “reform” package is the proposed repeal of the federal Alternative Minimum Tax. The AMT is estimated (in this great table by the Tax Policy Center)
to have been paid by less than 3% of US tax units (generally individual households) in 2016. However, richer tax units are much more likely to pay the AMT than the typical American.
Likelihood of paying AMT vs others in US
$200K-$500K income- 10 times more likely
$500K-$1mil income-over 22 times more likely (!)
Over $1 mil income- 6.9 times more likely
So AMT repeal is an obvious giveaway to richer that very few everyday people will be able to take advantage of. Add that to the drop in rates for the rich and corporate, and this package is bad enough. With our massive and growing inequality, as well as the inevitable increase in the national debt and deficit leading to cuts in some other types of programs (which is the intelligence of the GOP’s design here), I have no reason to think these plans would lead will be any kind of sustainable, helpful growth for the overwhelming majority of Americans.
Then throw in the proposed cut of the corporate tax rate from 35% to 20%. Not that most corporations pay that amount anyway, but there's no word on what kind of loopholes will be closed in the corporate tax structure to keep this from being anything but a disgusting handout to businesses that don't need it. In addition, lowering the corporate rate to such a low level would seem to encourage even more reckless behavior from these soulless organizations while discouraging the paying of wages and hiring of workers as a means of growing a business.
The real question becomes “Will there be ANYTHING thayt helps those of us outside of the elite Club?” And what are the “closed loopholes” that could help pay for the giveaways in this “reform”? The Trump/GOP document deflects from this question, with this paragraph.
In order to simplify the tax code, the framework eliminates most itemized deductions, but retains tax incentive for home mortgage interest and charitable contributions. These tax benefits help accomplish important goals that strengthen civil society, as opposed to dependence on government: homeownership and charitable giving.
I’ll ignore the bullshit, loaded-language statement about “dependence” at the end, and go into what would likely happen to your taxes as a result. The most popular deduction that isn't mentioned in the Trump-GOP document, and therefore is likely on the chopping block, is the deduction many take for State and Local Taxes (SALT). This map from the Tax Foundation explains who uses the highest amount of SALT deductions, and you can see southern Wisconsin is among the darker shades on the map, showing higher deductions.
Getting rid of SALT means a sizable tax increase if you are a homeowner in Wisconsin, because the tax break you get from property taxes is GONE. In addition, if you are a higher-end earner but outside of the AMT (i.e., a typical upper middle-class Wisconsinite), the thousands you pay in state income taxes also won’t be written off at the federal level. This type of screw job is the way the Trump Admin and the GOPs can come close to not blowing the deficit sky-high with their other giveaways to the rich.
On a side note, as a student loan payer, I wonder if that writeoff of interest is going away. Me and my wife make enough to put us near the top limit of that writeoff as it is (we only can write off part of it), but it’s still a useful item that reduces our taxes by around $100-$200 each year. And I bet a lot of younger people just starting out get an even bigger benefit from the student loan interest deduction, since loans are bigger these days and their incomes are general smaller. If that goes away, they should be PISSED.
“But Jake, the Trump/GOP plan also doubles the standard deduction to $24,000 for married couples and $12,000 for single filers.”
Well that’s generally nice if you’re at a lower level of income and/or don’t do things require much in terms of deductions (i.e., renter without much in investments or interest payments). But this doesn’t matter if you still get more deductions from mortgage interest and/or charitable contributions and/or whatever else is left, since you’d take the higher amount anyway.
There are also other economic side effects at risk, on top of the obvious point of richer people and corporations hoarding more of their gains. If more people are pushed into taking the standard deduction through tax “reform”, then it could be a strong disincentive for people to buy houses or live in certain communities because there is no tax benefit to paying property taxes. This is something that Madison Mayor Paul Soglin recently warned about, as fewer people wanting to own homes could depress property values, and raise tax rates for all people in the City.
Since 1913, taxpayers have been able to deduct state and local taxes from their federal income filings. It’s seen as an indirect federal subsidy to cities because it enables them to collect more from property taxes. Without it, Soglin predicts “tremendous pressure” to cut city services. A majority of taxpayers do not itemize their taxes, opting for the standard deduction. So proponents of eliminating the SALT deduction say it primarily benefits higher earners who are more likely to itemize. But Soglin counters that it will leave local governments paying for tax cuts for corporations and billionaires. If the mortgage interest deduction is eliminated, too, he says it’s a double-whammy to the city’s coffers.
“It would significantly lower the value of single, owner-occupied family residences which, in turn, means we would have to increase the mill rate to maintain existing revenues,” Soglin says, adding that homeowners would have to pay an average $3,700 more in federal income taxes.
“This is so important and nobody is talking about it. This may be one of the biggest ripoffs in the country’s history,” Soglin says. “Why don’t we have members of Congress reporting to their constituents what they are contemplating here? Why isn’t the governor explaining the enormous impact this would have on the state?”
Well Mayor, that’s because Republicans in Congress don’t give a fuck about anyone that’s not a lobbyist or a donor, which most homeowners aren’t.
There are other policy and economic complications. Would the removal of the deduction for high out-of-pocket costs for medical expenses mean some people don’t get the care they need (or end up taking a double-whammy because they don’t get the deduction for those extra costs)? And what happens if Congress actually does deform health care and makes more people uninsured and/or pay more out of pocket? In addition, will some people avoid furthering their education if there is no writeoff for either the tuition costs or student loan interest, leading to a lower-skilled work force?
This is why this tax package will definitely be a “devil in the details” situation, since we don’t know what the cliffs are for the new tax brackets and exactly which deductions stay and which will go. Since there is no bill spelling this out and few other specifics, it will be months before these tax items are even attempted to being voted on. But if the framework that was released is any indication, you can bet it’ll be a regressive pile of trash that won’t help anyone except the donor class and other plutocrats. Which is the point, of course.
Not a good sign here.