The Tax Plan
President Trump and the Republican leadership are taking a big swing at trying to accomplish some legislation in 2017. Having failed on health care (at least for the moment) and without taking up promised infrastructure improvement or immigration law reform; they have moved onto the Republican “holy of holies,” tax reform.
It has been Republican theology that reducing taxes on the wealthy and businesses will improve the American economy. While this has been their belief for the past century, it came to fruition in the Reagan Administration when they actually made the last major modification in tax law. And even though this “trickle down economics” did not deliver the benefits for the middle and lower class incomes that were promised, we are back to it again here in 2017.
Republicans state that the United States has the highest statutory corporate tax rate in the industrialized world at 39% (35% Federal, 4% State.) While that statistic is true, the effective (real) tax rate paid by most major American corporations is 12.6%.[1] The Republican theory is that if the corporate tax rate is cut (from a Federal rate of 35% to 20%) corporations will be incentivized to stay in the United States, and also to increase wages for their employees, and US economic growth will accelerate.
These “givens” are not necessarily valid, as corporations will not necessarily behave in the manner expected by the Republican legislators. The reason for corporations leaving the United States is only marginally tied to taxes, and has more to do with the cost of labor and materials. If corporations are leaving the US for labor costs, even if they stay it is unlikely they will increase wages without a commensurate shortage in labor supply.
It is true that many large US corporations have money “parked” in lower tax nations: for example, Apple Corporation has $111 Billion parked on the island of Jersey (off the coast of the United Kingdom) to avoid US taxes[2]. A lower corporate tax rate might encourage them to return that cash to US soil (and pay taxes, though since they have paid little tax there, it’s unlikely that they’ll “pay this piper.”)
However, given that Republicans are going to pursue this action, it drives the entire rest of the tax plan.
Corporate tax cuts will reduce the amount that the United States Treasury takes in revenue. Another part of Republican theology is that the US Government should strive to not create a deficit (spending more than it receives) or increase the US Debt (the entire amount the US Government owes (approximately $20.5 trillion.) By cutting the corporate tax rates, the pressure is on to find off-setting tax revenues to make up for the planned reductions.
Part of this balancing act is based on the Republican theory that the corporate tax cut will jump-start the economy, increasing growth. In 2016 the economy grew 1.6% (Gross Domestic Product – GDP.) Projections for 2017 are for a 2.2% growth. Gary Cohn, the White House chief economic advisor, believes that the Republican corporate tax cut will drive the GDP over 3%, thus creating more taxable revenue and balancing the costs of the tax cuts[3].
So what about the rest of us? It is also a given that any across the board cut in personal taxes will generate a much greater savings for the wealthy than the poor (in terms of dollars.) That is a common sense statement, as the wealthy generally pay more in taxes (in dollars, not percentage of income.)
The first part is to reduce the number of tax brackets (in the House plan) from seven to four. This would put a lot of the lower and middle class incomes into different tax brackets, with many paying less.
The standard deduction, taken by individuals who don’t itemize their deductions, will increase from $6000 to $12000 per person ($12000 to $24000 for a married couple filing jointly.) This would mean that many who now itemize may just use the standard deduction and get significant tax savings. However, for those whose itemized deductions are greater that the new standard deduction, there will be some complications.
The tax plan will remove several deductions. State income taxes will no longer be deductible though property taxes up to $10000 will still be deductible. Mortgage loan interest is still deductible, but caps out at $500,000 loans. Student loan interest will not be deductible. Medical costs will not be deductible (the deduction for costs greater than 2 ½ percent of gross income – which meant that if you used it, you had some serious medical costs.) And, while charitable deductions remain, the raising of the standard deduction will reduce the tax incentive for many people to give to charity.[4] In addition, the personal deduction (2016 – $4050) for individuals and their dependents is gone though the child tax credit will increase from $1000 to $1600.
For the wealthy, a lot of the same business and financial deductions that helped them to pay less taxes will continue. For example: Warren Buffet paid at a 17.6% tax rate, while the highest rate is 35% (Buffet states that he pays a lower rate than his secretary.[5]) And the estate tax (“death tax”) that taxed estates over $11 million will be faded out by 2024.
Depending on the numbers, personally this may be a tax cut, or a tax increase. However, the Senate Republicans, in order to fund their version, have decided to try to drop the individual mandate in the Affordable Care Act (to stop supplementing health insurance) saving $338 billion over ten years. It is also projected to leave 13 million people without insurance.
This may take the vaunted tax overhaul back to the drawing board of Trump-Care/Obamacare once again. It’s hard to imagine why they want to mix those fights.
Good Bedtime Reading: Committee for A Responsible Federal Budget (a bipartisan plan)
http://www.crfb.org/sites/default/files/tax_cuts_dont_pay_for_themselves_final.pdf
[1] http://money.cnn.com/2013/07/01/news/economy/corporate-tax-rate/index.html
[2] https://www.nytimes.com/2017/11/06/world/apple-taxes-jersey.html
[3] https://www.cnbc.com/2017/09/28/trump-advisor-gary-cohn-says-we-can-pay-for-the-entire-tax-cut-through-economic-growth.html
[4] http://www.chicagotribune.com/business/ct-biz-trump-tax-plan-standard-deduction-charities-20171109-story.html
[5] http://money.cnn.com/2013/03/04/news/economy/buffett-secretary-taxes/index.html
