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?
I have no idea what your income is but I’m guessing you aren’t in the highest marginal tax bracket that I was in before I retired. That’s probably why a 50% rate sounds fine to you. I’ve got an idea, since you think money saved hurts the economy, let’s impose a 50% wealth tax on savings! Talk about stimulating the economy, and not touching the poor. The only thing wrong with both those ideas is they both confiscate money from minority groups just to benefit the majority, and that’s just not right and not fair.
Oh geez, we’re talking about a 50% vs. a 40% rate on income over $1 million, not a 90% rate (which we did have at one point). I don’t think that is a wild suggestion, particularly from a historical perspective or with the deficits we have.
Is raising taxes on low and middle income earners while slashing taxes on the 1% more fair? Because that’s what’s on the table.
Also – 2,600 words about a real plan in front of us, and you pick out 1 line in my imaginary plan about a suggested higher tax rate? Let’s focus on reality here.
Ten percent is not insignificant. It is what I’ve given out of my gross pay for my whole life to nonprofits so I know what it feels like. You didn’t comment on a wealth tax. The exact reasons for you favoring a “progressive” income tax should lead you to favor a progressive wealth tax. If someone has over one hundred thousand in net worth while the poor have a negative net worth why not charge them a few percent of their net worth in taxes each year and give that to the poor and or the deficit? Those rich savers could afford it. It would be a new tax in addition to all others so it really would help the deficit and also would feed money to those quick spending poor people. Except that one might hit a little closer to home? I’m just saying any tax is always a great idea when other people are the ones paying it.
The big problem with your plan is that it encourages people to avoid taxes by saving nothing, which will cause an entirely different crisis in a few decades.
In that case I would go finance a $10M house so everyone else can subsidize it for me. Sweet Idea!
But that 10% is not 10% of your total income, it’s 10% of your taxable income over $1,000,000 per year. So if you make $1,000,001 in taxable income that tax increase would cost you 10 cents.
Also, I’m guessing that with a $1M+ salary, you are managing to keep food on the table…
Good and useful piece. What do you think of the proposed (and now dead) border adjustment tax?
Great article G.E.! This tax plan does not accomplish what our lawmakers are selling. Its a complete redistribution of wealth with just enough to placate people who don’t make top dollar.
The plan has a couple good things however they aren’t specific enough to be useful. increaseing the standard deduction is a good thing, but if there are increases in the tax rate it could mean that middle income people end up paying more.
It also seems that people don’t understand how progressive taxes work. If you are in the 39.6% tax bracket, it doesn’t mean that all of your income is subject to that tax rate its only income over $400k, all the income below that is taxed at lower rates.
Also eliminating the Estate Tax and AMT, like you said, is a massive tax cut to high earners…
Thanks for putting this together.
I am less concerned about whether the top rate is 39% or 35% as I am with the incredibly generous (or wasteful) treatment of capital gains. Capital gains taxes are much lower than ordinary income taxes, and between the high estate tax exemption and “step up” basis at inheritance, literally millions in capital gains can be passed on tax free to heirs.
Example: I build a large portfolio of stocks that I don’t sell (and therefore pay no capital gains on). When I die, my basis is $1 million, but the value is $3 million. Since the $3 million is below the estate tax threshold, my heirs pay $0 in taxes. PLUS, their basis is now $3 million, not $1 million. So $2 million in capital gains, $0 paid in taxes.
You raise a great point. Capital gains USED to be taxed at ordinary income tax rates. And with the changes outlined in this plan, there would be a massive loophole that means billionaires would pay less capital gains (essentially $0), while the rest of us continue to pay. Yet another tax dodge available to the ultra-wealthy that isn’t open to the rest of us.
Regarding the Estate Tax:
Why should anyone be taxed for what’s been bequeathed to them?
Even the ultra-rich?
Is there a good reason why the rich should be penalized for this, just for being rich?
And isn’t it really some form of double tax, since the original purchase prices of a lot of items were taxed already?
Note Tom’s previous comment, for starters.
Setting the top tax bracket to 50% seems a bit excessive when you factor in state taxes, social security, Medicare, etc. I would favor keeping the top tax bracket where it is, but making sure the top tax bracket is actually getting taxed on the majority of their income. Also, I wonder about the practicality of eliminating the stepped up basis rule, but limiting the overall estate tax as that money has already been taxed.
IRS funding should also increase so they can audit a higher number of filers. Think of how much revenues would increase if they had the capacity to focus on a wider range of tax payers. For example, I’ve hired many contractors, landscapers, etc who offer cash discounts and clearly don’t declare all their income. If some of those lower level tax cheats actually worried about getting audited, they would be less likely to risk it.
Finally, at the lower end, long term reliance on government assistance needs to be capped, unless someone is disabled. Too many people live off the government their whole lives while they don’t work and in many cases abuse drugs.
You’re not conservative because you want to punish those who’ve done well financially. You’re a liberal pretending to be conservative.
Using your logic, liberals are interested in punishing success, which is quite a stretch.
What’s the true conservative plan – not “conservative” as in appealing to the Trump base, but the true fiscally-conservative plan? G.E. believes that tax cuts need to be paid for by something other than hoping for massive growth, which is textbook fiscal conservatism.
I think your comment speaks to the problem in public discourse these days. Why does someone ONLY have to agree with ALL of the views of 1 particular party? Our government works best when we take good components of each.
This plan in front of us punishes those who have done poorly financially to benefit those who have done well. Are you in favor of that instead?
This is exactly spot on. Why can’t we take the good from both parties? That’s what I keep saying, but it seems that in this terribly divided country, you have to be completely on one side of the divide or the other.
For what tax year do you think these changes would become effective?
If they pass, next year.
More than enough comments focused on 1 of my suggestions, when I dedicated 2,600 words to breaking down the current REAL plan in front of us. How about some comments on the real plan in front of us, please?
I do like the idea of non-child dependents like the elderly, but I do see some issues with this tax plan. One of the issues is that the people passing this legislation tend to be the ones benefiting from tax cuts to the rich. It’s infuriating.
If this passes (and remember, there’s a very good chance it won’t – look at what happened with healthcare) it’ll be kind of brilliant in a Machiavellian way. It’ll disproportionately harm the poor, who normally already vote Democratic, so they won’t lose any votes. Plus, poor people tend to vote at lower rates anyways, further aggravating them won’t cause much damage to Republican voting prospects as a whole. But, by giving the rich so much more money, it’ll give them more pocket change to donate to further political campaigns, helping Republicans out further.
Then, as a double whammy, if Democrats take back power and roll this back, Republicans can make a strong voting argument that Democrats raised taxes on the middle class – probably won’t be much of a tax increase but these details won’t matter. And, if this adds so much to the deficit that Democrats are forced to raise taxes above what they currently are to compensate, it becomes an even better attack point for Republicans to win further elections.
G.E., I agree it’s bad policy. But in terms of helping the people trying to pass the bill (e.g. the Republican party) win further elections, it’s extremely clever.
If nothing else, Republicans have shown they are very skilled at winning elections.
Why taxes will never go up with the GOP in power and likely will only go down the more they are put in power.
Valiant thought that you could raise the taxes on the wealthy who also fund the GOP candidates…who want a smaller government….
That’s like going to McDonald’s and paying McDonald’s prices but expecting to get a high end steakhouse experience.
Update: one of the creators of “trickle down growth” under Reagan just admitted that it doesn’t work and never did.
A major problem with the new plan is that it will hit low and middle income families harder than advertised. The elimination of the personal exemptions can easily wipe out the increase in the standard deduction amount. A family of four gets 16200 of exemptions and 12700 of standard deduction for 28900 total off of taxable income. The new plan wipes 24000 from taxable income. Add to that the fact that those previously being able to exceed the standard amount is now made much more difficult with elimination of major categories and the increased threshold. Also factor in the 20% increase in the lowest tax rate (from 10% to 20%) and the middle class miracle might not be such a miracle.
I meant from 10% to 12%
Bravo, Sir. Lucid, accurate and reasonably comprehensive.
I think this is a great summary of the problems with the tax proposal and a good theory on how to improve our taxes. Simplification without cuts is what we need. To me it’s just crazy to talk tax cuts for the rich and corporations at a time they have never been richer or more prosperous. If economic growth came from those entities having more money we’d be killing it right now. You’re absolutely right they’d just plow their tax cuts into buybacks and bank accounts of the very rich to be passed on to their heirs someday.
On a separate but related issue, I’d question your thoughts on the national debt and the idea of a “grand bargain” to bring our debt down over time. I personally think debt is a big problem, and yet we (GOP in charge) are talking tax cuts! My take is that looking at the reality of our spending and benefits (and what people really want in spending and benefits when it comes to the reality of cutting them) makes the debt near impossible to address with spending cuts alone. Thinking back to the grand bargain negotiations several years ago they were talking around 4 for 1, spending cuts to tax increases. Reasonable spending cuts across the board, sure, but then where to increase taxes? I’m not super opposed to decreasing the number of people who don’t pay taxes. In reality it is 47% of adults not paying federal taxes, I’d be up for driving that down, even if the rate is very low like 5%. It both takes away the free loader argument, and gets more people with “skin in the game” if you will. Though don’t get me started on the number of people who think their taxes are too high, it’s like 70% which means about 20% of people pay no taxes and think it is too high, so civic education needs some work…
A bit off topic, but to address a variety of concerns I might back the idea of welfare cuts in exchange for a huge infrastructure program, sort of a get to work thing, but I don’t know how well that would work in reality.
Sorry for the rant, but I’m with you. Our country and government needs a dose of pragmatism and reality. At least to me that reality is a country with super low taxes and a debt problem. It won’t be fun or popular to deal with, but someday sooner or later we’ll have to, and better to not wait till it’s a crisis.
Basically a carbon copy of trickle down Reagonomics. Which was clearly rank self-serving nonsense even before enactment. The disastrous fiscal outcome was totally predictable. And a major factor in driving inequality. The average person’s tax cut was so minuscule as to be imperceptible.
And yet despite abundant research that it was malarkey, Republicans are winding up for another pitch. But I don’t think most will be fooled again, given that taxes didn’t really go down for the typical working stiff.
The only way any tax program is going to work for everyone, especially the MIDDLE class, is for the tax code to be scrapped and simplified. Categorize people into the income tax brackets based on their gross pay, hit everyone for taxes on their gross income, and let the People spend whatever is left however they see fit. Less loopholes, less B.S. to sift through, less IRS auditing staff needed, less no tax-paying citizens…A win for everyone.