For individuals, the GOP tax plan ends up mostly a wash
Beware politicians promising simple solutions to complex problems.
Republican leaders are touting the simplicity of their proposed tax system, promising a postcardsized return that requires little effort to complete. But closer analysis reveals that the GOP tax plan will produce tax cuts for businesses and those who own them, while doing next to nothing for most taxpayers and, in some cases, indirectly raising taxes on the upper middle class.
Whether you benefit or not depends on where you are in life, and what exemptions, deductions and credits you claim.
Overall, the GOP tax plan would add $1.7 trillion to the deficit by reducing government revenues. Most of those losses will come from lowering the tax rate on businesses from 35 percent to 20 percent. Corporations have it easy. Congress plans to grant them a lower tax while keeping most deductions.
Most individuals will see lower rates, but under the House plan, couples earning between $260,000 and $416,000 a year are
bumped into a higher tax bracket. The bottom line is that while Congress is cutting $1 trillion in taxes on individuals over the next 10 years, it is also cutting $1 trillion in tax breaks.
A third of the tax cuts would go to the top 1 percent of Americans, who according to the conservativeleaning Tax Foundation, paid 40 percent of the individual income taxes collected last year. Over the plan’s 10-year horizon, though, the top 1 percent will see more of the benefits because of the way Congress is indexing income to inflation and the estate tax, according to the left-leaning Institute on Taxation and Economic Policy.
A quarter of middleincome Americans will see a tax hike by 2027 because the provisions that benefit the middle class phase out, the institute said.
How much of a tax break you’ll see depends on your income, where it comes from and whether you itemize your return.
The elimination of the alternative minimum tax is a huge win for higherincome people. The AMT currently catches wealthy people who use too many deductions to avoid paying taxes and forces them to pay a supplemental tax. Congress introduced the AMT to keep people from gaming the system, and the GOP plan repeals it.
Reducing or eliminating the estate tax also benefits the extremely wealthy, because right now they are the only ones who pay it. Estates valued up to $5.49 million are currently exempt, and both the House and Senate plans raise the exemption to $11 million.
The more clever trick in the GOP plan, though, is the near-doubling of the standard deduction while eliminating the most popular itemized deductions. Touting this as a big step toward simplifying the tax code, House Republicans predict the number of taxpayers filing itemized returns would drop from 30 percent to 6 percent. Presumably this will save time and accounting costs.
The problem is that many families will end up paying more because the higher standard deduction does not equal the value of the deductions and exemptions the GOP wants to eliminate. A couple with two children, for example, can take two standard deductions and four personal exemptions for $28,000. Under the GOP plan, the total deductions and credits would be $27,600.
For other couples, the standard deduction of $24,400 does not make up for lost itemized deductions, such as the $2,500 student loan interest rate deduction.
The Senate plan would eliminate the state and local tax deduction, which in Texas lets homeowners deduct the money we pay in property taxes. The House keeps the deduction but limits it to $10,000. Either way, the higher standard deduction does not make up for the lost property tax deduction for upper middle class home-owners.
The House plan eliminates the medical expenses deduction, which would hit households with elderly or chronically ill members. Some households routinely deduct $30,000 a year and would end up paying higher tax bills. The average Medicare beneficiary pays $5,680 in out-of-pocket expenses a year, and without the deduction, these elderly people could pay taxes on more of their income.
Over the next 10 years, the same taxpayer might actually see both tax reductions and hikes, as compared with the current tax code, as he or she passes from young adult, to parent to middle age and retirement. The odds that a single taxpayer will see a net benefit over his or her lifetime are pretty slim.
There is an enormous amount of hype around the GOP plan, from proponents and critics, and much of it is ludicrously exaggerated. The rich will see greater benefits, but that’s because they pay more in taxes. The business community will do well, but this will not be revolutionary. There might be a short-term economic boost, but it will not be the windfall the GOP claims.
Average Americans, though, should not expect to see much of a difference in their lives, perhaps a few hundred dollars here or there. This plan will not do much for them, and that is perhaps the most damning praise imaginable.