After ruminating on it for the past day, this is my official post about the GOP Tax Plan, more formally known as the Tax Cut and Jobs Act.
I LIKE taxes, but I am by no means an expert despite my Master’s in Accounting, though I have prepared taxes for some folks over the past few years and like to remain informed. While this plan has not yet passed even one house of Congress, knowing about the plan and how it affects you and your family is good information to have and can be used when discussion your opposition/support of the plan with your elected officials.
Axios has provided a couple of great breakdowns about the tax plan. First, here’s a nice breakdown of what the tax plan actually is, and a subsequent piece that breaks down the winners and loser because of the plan. If you prefer to go straight to the source, the GOP Ways and Means Committee, and its chairman Rep. Kevin Brady (R-TX) has provided a bulleted list as well. You can check that out at this link.
Based on the official name of the GOP Tax Plan – The Tax Cuts and Jobs Act – we can see that the GOP still believes that lower corporate taxes will result in higher employment, the often debunked theory of “trickle-down economics.” But in order to do this, their plan will add AT LEAST $1.5 trillion to the deficit. I’m old enough to remember when the GOP was the party of “deficit bad,” but I digress.
Anyway, the GOP Tax Plan is ultimately a permanent tax cut for the wealthiest Americans, and a “phased in” tax increase for everyone else, as outlined in these tweets:
Over ten percent of the net tax cut goes to the tiny number of super-rich families who pay estate tax https://t.co/Ixw0AyqwC7
— Matthew Yglesias (@mattyglesias) November 2, 2017
How a touted House tax cut for middle class fam becomes a tax increase. By 2027, fam, 2 kids, 59K, tax inc of $500 https://t.co/ab6hL08fV2
— David Kamin (@davidckamin) November 3, 2017
For individuals, we will no longer have 7 income tax brackets. The #GOPTaxPlan reduces this down to 4. This is a good thing, right? It is a simplification of the tax calculation in a way, though it’s really not that dramatic in the grand scheme of things. After all, one of our current tax brackets only covers $1,700 (for individuals) of income (the 35% bracket). So under our marginal tax system, having fewer tax brackets appears to be better, but let’s do some math! (All figures based on single limits so double numbers for married)
(I’m going to use the new tax brackets to illustrate the difference between what we have currently and what it could potentially look like if the GOP Tax plan is approved as is.)
|Taxable income (ind.)||Tax under current law||Marginal tax rate||Tax under new law||Marginal tax rate||Difference|
Source: Author’s calculations; *Arbitrary amount used to illustrate effect of top tax rate under new plan
Now, you’re probably thinking to yourself: “Seeing a tax decrease across the board here, Robert. Why does everyone think this thing isn’t that great?” I think the answer to that lies in how we get to that taxable income number.
I’ve written about taxes before, most recently when I broke down President Trump’s leaked tax return, and I understand that most people don’t really understand the math behind calculating taxes. Most people just click through on TurboTax or whatever, answer the questions, and let the system do all the work. Even people that use tax preparers do the same thing. There is a reason why politicians always want to “simplify” the tax code: it’s because taxes are complicated! To the average lay person, a tax return is just a bunch of lines that most taxpayers will never use. Residential energy credits? American Opportunity Credit? Domestic production activities deduction? It’s easy to see why taxes are confusing to most people.
But the Form 1040, the “U.S. Individual Income Tax Return,” is THE tax form everyone is familiar with, though an actual tax return often includes multiple Schedules and worksheets. This is why I said that having Trump’s 1040 from one year doesn’t really paint a complete picture of his tax situation or wealth, but I digress. As stated previously, the problem with the GOP tax plan – as far as individuals go – is how taxable income and income will be calculated.
The 1040 is broken down into eight main sections. The GOP tax plan impacts FIVE of these sections as far as I can tell: Exemptions, Adjusted Gross Income, Tax and Credits, Other Taxes, and Payments. All the changes ultimately impact how a taxpayer gets from “raw” income to taxable income, with varying levels of impact.
The basic tax calculation is this:
- Net income – “above the line” deductions = Adjusted Gross Income (AGI)
- AGI – itemized/standard deduction & personal exemptions = Taxable Income
- Taxable income x graduated tax rates = Tax (this is the tax shown in the chart above)
- Tax + Alternative Minimum Tax (AMT) – Credits + Other Taxes = Total Tax
- If taxes withheld/paid exceed total tax, you get a refund
- If total tax exceeds taxes withheld/paid, you owe additional tax
The first thing to go that impacts everyone’s taxes is the personal exemptions. A personal exemption gives taxpayers an income exemption based on their house size. If it’s just you, (for 2016) $4,050 of income comes doesn’t count. If married without kids, it’s $8,100. If you were like my parents and had five qualifying kids at home, that’s a grand total of $28,350 just taken off your taxes for existing. You can see what a boost that was for families or low income individuals.
The GOP tax plan tries to cover some of this loss by nearly doubling the standard deduction, and for most taxpayers, it actually helps. Another chart, using 2016 figures and the three examples from the previous paragraph:
|Tax Situation||2016 Exemption / Standard Deduction||GOP Plan Standard Deduction||Difference|
|Married, no kids||$20,700||$24,000||+$3,300|
|Married, 5 kids||$40,950||$24,000||-$16,950|
Yikes! That big family was sitting pretty, immediately losing nearly $41,000 in income just for existing. For example, if both parents were working and brought home a combined $100,000, they would only be taxed on $59,050 of that income. Under 2017 tax rates, and assuming no other credits, that would be a tax bill of $7,925. Under the GOP tax plan, they would have $76,000 of taxable income, resulting in a tax bill of $9,120! So even though they are paying a lower marginal rate (12% vs. 13.4%), more income is taxed.
Fortunately for them, the GOP has tried to alleviate that sticker shock by raising the child tax credit by $600 and adding a $300 per adult credit. Our huge family – assuming the kids are all under 17 and qualify for the full Child Tax Credit – would see that tax bill reduced by $8,600, compared to the $5,000 reduction under current rules. The GOP tax plan has successfully cut taxes for this family, so I guess we declare victory for everyone!
But wait. Personal exemptions are one small piece of the puzzle. Perhaps the biggest impact that the proposed changes have is the changes to some of the deductions. Under the GOP tax plan, student loan interest, medical expenses, and state and local taxes can no longer be deducted. Combined with the doubling of the standard deduction, most tax payers will no longer have any reason to itemize deductions, which will cause the tax benefit of charitable deductions to be lost. Why donate to charity if it can’t be written off, right? That’s the only reason people do it after all.
The mortgage interest deduction is also capped at $500,000 for new loans, and this deduction is a main driver in people buying houses because it allows them to go above the standard deduction and remove some of their income from taxation. Now, a new homebuyer would have to pay more than $24,000 in mortgage interest in order to take advantage of the benefits of homeownership. This is one reason why parts of the housing industry have already came out in opposition of the GOP tax plan.
Perhaps the biggest sign that this is really meant to benefit the wealthy people in this country (aside from raising the minimum income on the top rate to $1,000,000) is the elimination of the Alternative Minimum Tax, or AMT. The AMT is a supplemental income tax that was implemented in 1982 to prevent certain taxpayers from avoiding taxation altogether. For example, if not for the AMT, Donald Trump would have “only” paid $5.3 million on over $150 million in income according to the leaked tax return from 2005 due to losses and some other things. Instead, the AMT kicked in a disallowed a lot of things that allowed him to reduce his tax bill, tacking on an additional $31 million in taxes. Had we seen more of his tax return, or other years so we could get a fuller picture of his tax history, we could see the true impact that repealing the AMT would have on his personal situation, but let’s assume that it would mean tax savings of tens of millions of dollars for him and folks like him.
Ultimately, when you do the numbers, it’s hard to find people that wouldn’t see a tax cut under the GOP plan, and I think that’s what they want the story to be. Sure, people at higher income levels see about the same change in nominal income tax paid, but things like eliminating the AMT and estate tax will help them out more than people like me. Combined with the increase to the deficit – which results from decreased tax receipts because of the cuts – and you can expect that the long-term impact of something like this won’t be felt for a few years.
We are still a long way from the Tax Cut and Jobs Act landing on President Trump’s desk for signature, and I would imagine if it gets that far that it will be different from its current form. There are still some people in Congress that dislike adding to the deficit; it was one of the things that helped to kill the ACA repeal earlier this year. Whatever happens, the singular focus the Republicans have placed on passing “tax reform” while people in Trump’s inner circle are being indicted is quite telling of their priorities and how they feel about most of the country. They honestly think that saving a few hundred dollars a year on our taxes will make us forget that Trump is the most corrupt president since Warren G. Harding.
Pay attention to this bill. It won’t be going away anytime soon.
Until next time…