Update: a variation of what is detailed below was passed into law. I’m very interested to see how the new Republican attempt at tax reform shakes out. We should all be interested. Because if it passes, it will impact each and every one of us (and our country) financially for many years to come. The details are still being released, so I will update this post as needed, but I wanted to dig in to what has been shared already at this point from the Republican tax plan.
According to those promoting the plan, the promise of this plan is a middle class tax cuts, job creation, and no deficit increase. Do the numbers live up to those promises? We’ll take a look. But before we do that…
As you hopefully know from reading this blog, I’m a very fiscally conservative individual. And that personal fiscal conservatism translates to my view on how government should be run. Irresponsible tax cuts that blow up our deficit and are passed on to future generations are a real concern for me (as are $1 million in private jet flights in a few months time for a cabinet secretary). In my view, real tax “reform” should be a revenue neutral exercise, with no magic wand dynamic scoring pixie dust (aka “the cuts will pay for themselves due to economic growth”) non-sense.
I also believe – and legit economists agree – that tax cuts to low and middle income individuals are the most beneficial to the economy. It’s common sense, really. Put a few thousand extra dollars in to the pockets of a $50K income household and it’s almost always going to get completely injected right back in to the economy. Put a million dollars in to the pocket of a mega-millionaire, and most of it will end up in a digital vault and eventually passed along to an heir. Put a few hundred million in to the pocket of a corporation, and nearly 100% of it will be used to boost executive compensation and buy back company stock, both further enriching the digital vaults of those executives. There is a large body of evidence that shows that trickle down economics (giving breaks to the wealthiest in society with the promise that the benefits will magically “trickle down” to everyone else) – simply does not work.
With all this in mind, I tried to look at the ideas in the plan in a non-partisan light on an individual basis – what do I like, what do I not, what’s the impact going to be. Numbers. Data. Facts. Let’s jump in.
Individual Income Tax Changes:
- The number of tax brackets would reduce from seven to three, with tax rates of 12%, 25%, and 35% (current brackets are 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%). To hear politicians talk about reducing brackets, you would think your taxes would be more complicated because of the brackets. In reality, brackets add no complexity to the process of completing your taxes. It’s an output, not an input. Bracket consolidation typically means lower taxes for the rich and higher taxes for others because it is less progressive.
- The highest marginal bracket drops from 39.6% to 35%. The lowest bracket increases from 10% to 12%. The optics on this are not good. Clearly those who top out in the 10% bracket and every bracket but the 39.6% bracket need more tax relief than those in the 39.6% bracket. Who would get the biggest relief under this plan? The 39.6% bracket income earners. It’s worth noting that even at today’s top rate of 39.6%, we are already near all-time lows historically. The highest marginal bracket never dropped below 60% between 1932 and the 1980’s, a period when the U.S. enjoyed its highest economic growth. The United States also already has the 4th lowest individual average tax burden (including property, income, other tax) among the 35 developed OECD economies, at 25%. We have a budget deficit, in part, because our taxes on the wealthy are too low. Lowering those taxes exacerbates the problem.
- The standard deduction would double to $12,000 for individuals and to $24,000 for married couples filing jointly in exchange for less itemized deductions. This is an idea that I could personally get behind, if the math worked out. A higher standard deduction would mean a whole lot less work in itemizing. However, if you live in an expensive state (see next bullet point), this shift could really hurt you.
- State and local tax expense deductions would be eliminated. This means you could see double taxation. Bad news if you have lofty state and local taxes that you typically deduct (i.e. NY, CA, MA).
- The child tax credit would increase from $1,000 to an unspecified amount, and create a new $500 tax credit for non-child dependents, such as the elderly. I’ll hold my opinion here, since we don’t have the specified amount, but assuming it’s more – I like it.
- The alternative minimum tax (AMT) would disappear. There are some upper-middle class income folks that get negatively impacted by the AMT, but for the most part, it’s a tax that helps prevent mega-millionaires/billionaires from deducting their way to zero taxes and making sure they pay a minimum level for their income. This results in a huge tax giveaway to the 1%.
- The estate tax would disappear entirely (currently there is zero estate tax on estates up to $5,490,000). It’s been said the reason for doing this is to prevent small farms passed from one generation to the next be subject to massive taxation. However, a study showed, it would impact only 80 small farms. If you want to carve out an exception for small farms, go for it. But taking away the estate tax so that mega-billionaires (including our President) can pass down their inheritance to heirs, tax-free, would be a massive tax giveaway to the 0.1%.
Corporate Tax Changes:
- The corporate tax rate would be reduced from 35% to 20%. An oft-repeated miss-truth about corporate taxation is that the United States has the highest corporate taxes, which puts our companies at a competitive disadvantage globally. That would be true if corporations actually paid those rates. They don’t. They pay an average of half as much. According to the CBO, the effective U.S. corporate tax rate (the rate actually paid) on profits is just 18.6%. It should also be noted that U.S. corporate profits are at all-time highs, at almost $2 trillion/year. Now, if you want to eliminate massive loopholes and deductions (none of which is done in this plan), in order to make corporate taxation fair for every company and lower the overall tax rate to 20% – I can get behind that. But cutting it in half while doing none of that? That will result in a fiscal disaster.
- A new tax rate of 25% would be created for “pass-through businesses”, (i.e. partnerships and sole proprietorships), which are currently taxed at the rate of their owners. This could be catastrophic for lower income self-employed individuals. A 25% tax rate on “pass through” income represents a huge tax cut for higher profit small businesses (typically currently in the 39.6% bracket), but for lower income, self-employed individuals operating as sole proprietors that report income on their Schedule C (i.e. dog walkers/sitters, rideshare drivers, modest landlords) – a flat 25% rate could result in a massive tax hike for those currently taxed in the 10 or 15% tax brackets. Also, why would you intentionally put small businesses at a higher tax rate (25%) than corporations (20%)?
- Profits that have accumulated offshore will be subject to a one-time low tax, with the goal of ending the tax incentive to keep those profits offshore. I like the idea of getting this money back from unpatriotic corporations, however, how “low” are we talking? Seems like a key detail. Anything below 20% seems too low, and rewards bad behavior, in my opinion.
- Move from a worldwide tax system to a territorial tax system for multinational corporations. In theory, this means that companies would not be taxed on their overseas earnings. This seems very counter to the previous bullet and given that more than half of many big multi-nationals earnings are overseas, it seems like another massive corporate handout that actually encourages businesses to move more jobs overseas.
The Fiscal Impact:
The most complete fiscal analysis out there, completed by the non-partisan Tax Policy Center, estimates that,
“the proposal would reduce federal revenues by $2.4 trillion over the first ten years and $3.2 trillion over the subsequent decade. The business income tax provisions — including those affecting corporations and pass-through businesses — would reduce revenues by $2.6 trillion over the first ten years. Elimination of estate and gift taxes would lose another $240 billion. The individual income tax provisions (excluding those related to business income) would increase revenues by about $470 billion over the same period.”
In other words – this plan, as is, would dramatically cut taxes for corporations, business owners, wealthy heirs, and those in the 39.6% tax bracket, while raising effective taxes for many of us (some by bracket consolidation, some through removing deductions on certain items), and adding a massive amount to the budget deficit and national debt. When you break it down by who gets the most benefit, it looks like this:
The same analysis found that the top 1% of income earners would realize 79.7% of all the tax cut benefit, while the top 0.1% would realize 39.6%. Sound a little disproportionate to you? This plan doesn’t live up to the promise of middle class tax cuts (in fact, it’s estimated that roughly a third of the middle/upper-middle class would see tax increases).
But there IS a name for this type of tax policy: “trickle down economics”.
The “Kansas Experiment”
Trickle down economics, is an ideology that keeps coming back from the dead (even if no one dares to promote it by that name any more), despite all the data showing that it doesn’t work. Case in point: Kansas. Kansas was absolutely ravaged by trickle-down policy, and has provided a real-life sandbox of what happens when you slash taxes on the wealthy and corporations and don’t replace that revenue in other ways. In 2012, the Republican Governor of Kansas implemented massive tax cuts to the wealthy and businesses, saying that new economic growth would result in the cuts paying for themselves and everyone would benefit with great new jobs (“trickle down economics”). This included sharp reductions in income tax rates as well as a large drop in the rate paid by small business owners that file their taxes individually, aka “pass-through” entities. Sound familiar? What has happened since then?
- Instead of going up (“growth will pay for the cuts!”), state tax revenue has gone down by 22%, costing the state some $800 million a year.
- The credit rating of Kansas has been downgraded twice.
- Instead of creating new jobs, Kansas lost 9,700 private sector jobs last year (while just about every other state gained jobs). Actual economic growth in Kansas has lagged higher taxed Democrat-led states, neighboring Republican-led states that didn’t have massive tax cuts, and the United States as a whole.
- Governor Brownback paid for these tax breaks to the rich by making savage cuts in education, health care, transportation, and infrastructure.
- Kansas is spending $350 million less on public schools than 8 years ago, adj. for inflation. Some schools are only open four days a week.
- In 3 years over $1.2 billion has been taken out of the Kansas Highway Fund for tax breaks—while 3,000 bridges are structurally deficient.
- Meanwhile, Governor Brownback has refused to expand Medicaid (at federal governments expense), denying health insurance to 150,000 people in Kansas.
- The situation has gotten so bad that Republican state legislators banded together with Democrats to create a veto-proof majority to scale back the tax cuts (much to the dismay of the governor, who said he would veto).
Now imagine this on a country-wide level, at a time when our infrastructure, education, and disaster relief capabilities are in shambles, and we have massive challenges in health care and an opioid epidemic. If that sounds like the kind of country you want to live in – you’ll love this tax plan – because the plans are eerily similar (in fact, the Kansas Governor has been advising the Trump administration on this plan).
Kansas is One (Big) Example, but what About Trickle Down Results Elsewhere?
We have plenty of data on this too.
The International Monetary Fund (a collaboration of 189 country governments, focused on economic growth) sharply concluded in 2015 that trickle down economics don’t work:
“if the income share of the top 20 percent (the rich) increases, then GDP growth actually declines over the medium term, suggesting that the benefits do not trickle down. In contrast, an increase in the income share of the bottom 20 percent (the poor) is associated with higher GDP growth.”
What about corporate tax cuts and jobs/pay growth specifically? According to a massive study on the topic that looked at the payroll changes at 92 publicly held U.S. corporations that posted profits every year from 2008 through 2015 and paid less than 20% of their earnings in federal income tax,
“More than half of these lightly taxed companies actually shed jobs during the period when the overall economy boosted payrolls by 6%. Of the 92 companies studied, the median change in payrolls was -1%. Where did the tax savings go? Many of the companies on the list used the free cash to buy back stock, helping to boost the price of their company’s shares. The top 10 job-cutters each spent $45 billion in stock buybacks over the 2008-2015 period, a pace six times that of the S&P 500 corporate average, according to the researchers. The review also found that CEO pay among the 92 companies rose 18% during the period, compared with a 13% increase among S&P 500 CEOs.”
AT&T enjoyed an effective tax rate of just 8% between 2008 and 2015, despite recording a profit in the United States each year, by exploiting tax breaks and loopholes. Despite the enormous savings AT&T has realized, the company has been downsizing and has reduced its total work force by nearly 80,000 jobs during that time frame. The company has also spent $34 billion repurchasing its own stock since 2008.
Back when Reagan cut the corporate tax rate 14% in 1986, did pay go up? Nope:
In other words – lower taxed companies don’t hire or pay more. If anything, the data shows the opposite. And they put all the savings in to enriching executives and keeping shareholders happy. Where is the evidence that makes the job/pay case for blowing a $300 billion hole in our annual budget? It doesn’t exist.
In fact, Reagan’s own tax policy advisor recently admitted that the entire premise of growth from tax cuts has been a lie, stating,
“In 1986 we dropped the top income tax rate from 50 to 28 percent and the corporate tax rate from 46 to 34 percent,” said Bruce Bartlett, a policy adviser in the administration of President Ronald Reagan. “It’s hard to imagine a bigger increase in incentives than that, and I can’t remember any big boost to growth.”
I’m at 2,600 words here – and could go on and on, but I think I’ve laid out my argument as to why this plan will hurt and not help our country. In summary, this plan would:
- Increase taxes on 30% of the country and reduce taxes on the lowest 80% of earners by less than 0.5%.
- Increase the lowest tax rate, while slashing the highest.
- Massively increase taxes on lower income self-employed/small business owners.
- Get rid of the estate tax, which is a tax on the 0.02% of the wealthiest individuals in this country, at a time when wealth inequality is the highest it’s been in the last century.
- Give corporations a massive tax cut at a time when they are paying half the rate they should and profits are at an all-time high.
- Massively increase the deficit and our national debt.
There are some pieces I like and some that need more info., but overall, it’s a giant shitburger.
What kind of tax plan do I think would benefit the country?
- create a new highest marginal tax bracket at 50%+ for those who exceed $1 million per year in income, putting us back near (but still lower than) historical rates.
- expand earned income tax credits – which are loved by both parties.
- close absurd corporate tax loopholes and handouts – companies that make billions a year should not be paying 0% in taxes, while benefiting from our tax dollars.
- disincentivize tax sheltering overseas with tax penalties.
- incentivize corporate and small business job creation and profit sharing with tax credits.
- no dynamic scoring – tax reform can and should result in deficit reduction.
- expand the standard deduction and remove some obscure itemized deductions.
- cap the mortgage interest deduction (excluding very high cost of living geographies) – we shouldn’t be rewarding people for buying too much/too fancy of a home.
Do you like the Republican tax reform plan or my suggestions? Why or why not?