Digging into the Tax Cuts
Terry H. Schwadron
Oct. 1, 2017
Separating talk and reality of the Trump tax cut proposals is difficult mainly because much of the meat has yet to be attached to the bones.
But it is clear that there has been a whole lot of misstatement going on so far.
Basically, President Trump and his chief economic representatives, economic adviser Gary Cohn and Treasury Secretary Steve Mnuchin, all have been pounding the drum that this proposal aims at providing middle-class households with simpler tax forms and more cash left in their pockets, emphasizing that this package will not tilt towards tax cuts for the rich.
After a few days of analysis by various news organizations and groups like the nonpartisan Tax Policy Center, that sales pitch is simply wrong. The conclusion seems, as feared, to promise modest tax cuts for you and me, and huge amounts for the top 1 percent, along with a huge increase in national debt and with tons of cuts in government spending on programs that we want.
There is no doubt that companies will receive tax cuts and that there will be incentives to lure “repatriation” of corporate money held overseas; what is in doubt is whether that actually will result in the kind of domestic investment and job creation that eventually will pay for the cuts themselves. The cuts will cost at least 2.4 trillion over 10 years, and any plan to pay for it requires increasing the national debt, tax tradeoffs, spending cuts — and an abiding belief that lowering taxes will rapidly increase national economic growth.
Step One requires passage of the currently introduced budget resolution bill that would set authority for a 1.5 trillion increase in the national debt, and then allow further votes on tax cuts to that level with a 51-vote majority in the Senate.
Here are a few cases in which actual fact may help uncover whether the proposals are built on solid ground or on sand:
Individuals: The Tax Policy Center (TPC) says that 71% of households will receive a tax cut — likely in the hundreds of dollars up to about $1,320. Cuts for the richest fifth of Americans would average $19,510, with the cuts for the top 1 percent averaging $196,420. At the end of the day, collapsing seven tax brackets to three, trading increased standard deductions for itemized deductions, and the loss of selected tax benefits like deduction for state and local taxes, actually could raise taxes for some middle-class households. In 2018, average tax cuts could be $600 for most middle-class households, $130,000 for the top 8%, and $720,00 for the top 0.1%. The top 1 percent (those making $730,000 or more) would receive half of all the plan’s tax cuts while middle-income households (those making between about $50,000 and $90,000) would get only 8% of the total benefit, with the disparity growing larger over time. Bottom line, per the TPC: About 30 percent of those earning between $50,000 and $150,000, and 60 percent of those taking home between $150,000 and $300,000, would pay more under the Republican plan, according to the nonpartisan Tax Policy Center.
Debt: Every outlet agrees that the tax cuts will require deficit spending, putting pressure on social programs like Social Security and Medicare, and exacerbating problems for future generations. The Republican agreements would deepen the national debt by at least another $1.5 trillion over 10 years.
Eliminating state and local tax deduction: Several publications examined data to show that elimination of local taxes as a deduction hits unfairly, depending on where you live. As it happens, those more expensive local taxes are in states that tend to vote Blue. Hmmm. Probably not a coincidence. Among the sillier statements of the week was Gary Cohn saying home mortgage deductions and local taxes were not significant to most people in deciding whether to buy a home.
Simplification: Jonathan Weissman, argued in Slate, to “simplify the tax rules” (and save costs) the plan would also do away with personal exemptions, currently worth $4,050 from taxes for taxpayer and each dependent — and face an increase the lowest tax rate from 10% to 12%. Consider a married couple with two children earning $50,000. Today, they have the standard deduction, worth $12,700, plus four personal exemptions, worth $16,200 — a total of $28,900 in deductions. The new plan, $24,000 in overall deductions.
Estates: President Trump argues that eliminating estate taxes will protect millions of small businesses and farms. According to the Tax Policy Center, only about 5,500 estates in 2017 — out of nearly 3 million estates — would have to pay any taxes. About half of estates subject to the tax would pay an average tax of about 9 percent. That’s because for a married couple, about $11 million is exempt from taxation. Only 80 taxable estates would be farms and small businesses, concluded The Washington Post.
Corporate tax rates: The President says American business taxs are 60% higher than average foreign competitors in the developed world. In truth, most companies do not pay the listed 39% corporate tax rate, and closer to 27%. The proposal is for 20%. Several students conclude there is no basis to believe that any such saved money will be redirected into higher wages and economic growth.
Eliminating the alternative minimum tax: “I’m doing the right thing and it’s not good for me, believe me. … We are also repealing the alternative minimum tax, or AM..” said the President. The Post said Trump’s claim that he would not benefit from the tax plan is not credible. Of course, he has not released his tax returns, so it is difficult to know for sure. But he is certainly subject to the AMT — and the one recent tax return that has been leaked (2005) shows that the AMT increased his tax bill from about $5.3 million to $36.5 million. So at least in that tax year, he potentially could have saved $31 million.
Indeed, given all of the proposals from estate tax to the treatment of “pass-through” income as a business expense with lower rates, The New York Times estimates that the Trump family could save a billion dollars in taxes in a relatively short time. The President should just say so and drop the two-faced presentation he makes on behalf of the “tax reform” package.
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