For in­di­vid­u­als, the GOP tax plan ends up mostly a wash

Houston Chronicle - - BUSINESS - CHRIS TOM­LIN­SON

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.

J. Scott Applewhite / As­so­ci­ated Press

House Ways and Means Com­mit­tee Chair­man Kevin Brady, R-The Wood­lands, has been work­ing on the House’s GOP tax plan.

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