Don’t believe everything you hear or read.
Naysayers are saying that proposed tax reform would help corporate America and the very wealthy, while ignoring those who really need tax relief. The proposed tax reform would help consumers at all income levels in several ways.
Last week, we focused on corporate tax reform. We made the point that lowering corporate rates would help U.S. corporations be more competitive and spur economic growth. The net result would be more jobs and higher wages.
This week, we’ll look at the impact on consumers, but first we should note that what’s good for corporate America can be good for everyone.
$3,500 Average Wage Increase Predicted
As Forbes contributor Bill Conerly wrote, “Some estimates are that 70% of the corporate income tax burden is borne by workers through lower wages while 30% is borne by owners of capital — both fat cats and middle-income investors.”
Conerly says taxes on investment are the worst for economic growth, and that a high tax on investments leads to reduced investments.
In fact, Boston University economist Laurence Kotlikoff wrote in The Wall Street Journal that, “The new plan’s business-tax provisions will reduce the effective marginal tax rate on U.S. investments dramatically, from close to 35% to under 19%. Depending on the year in question, my global dynamic macroeconomic model predicts a 12% to 20% expansion in the U.S. capital stock, producing an average $3,500 real wage increase for each American working household. Moreover, economic growth spurred by the business-tax cuts will raise tax receipts enough to make the plan revenue-neutral.”
More money in consumers’ pockets would mean more spending and additional economic growth.
Brackets and Deductions
While the final legislation has yet to be approved, similar but different bills have been approved by the U.S. House of Representatives and proposed by the U.S. Senate.
Tax Brackets. The tax code currently features tax brackets of 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. The Senate bill would continue with seven brackets, but would lower rates for the middle class and reduce the top rate to 38.6%. The House bill reduces the number of brackets to four, maintaining the top rate of 39.6%, but the rate would apply to individual filers earning $500,000 or more (up from $418,400) and joint filers earning $1 million or more (up from $470,700). The other brackets would be 12%, 25% and 35%.
Under the House bill, for example, the 25% rate would begin at $45,000 for single filers and $90,000 for joint filers who are married; currently, it applies to single filers earning as little as $37,950 and joint filers earning at least $75,900.
Responding to pressure from Democrats who claim that wealthy Americans don’t pay enough taxes, the House bill adds a new 45.6% “Bubble Tax” bracket on incomes between $1.2 million and $1.6 million.
Both bills would increase the standard deduction, so that the first $12,200 of income for individuals (up from $6,300) and the first $24,400 for joint filers (up from $12,600) would be exempt from taxation. Both would also increase the child tax credit, which is currently $1,000, to $1,600 per child under the House bill and $2,000 under the Senate bill.
Fewer Deductions. Both bills exchange fewer deductions for overall lower rates. For example, both would eliminate the federal tax deduction for state and local taxes, although the House plan provides a property-tax deduction up to $10,000 a year.
Eliminating that deduction is proposed by high-tax states, such as New York and California, since it enables them to blunt the impact of increasing their taxes. The average state income tax rate is 6.65%, “so on average under the House bill the top rate rises by four points while the Senate bill increases it three points,” Canada’s Financial Post notes.
Both versions also eliminate the alternative minimum tax (AMT) for both individuals and corporations. The AMT, which was initially designed to tax wealthy taxpayers, is a supplemental income tax imposed by the U.S. federal government for individuals, corporations, estates and trusts with exemptions that lowered their standard income tax payments.
The estate tax exemption would double under both bills, but the House bill would eliminate it altogether by 2023. Currently, the estate and gift tax exemption is $5.49 million per individual, up from $5.45 million last year. For married couples filing jointly, the estate tax exemption is $10.98 million, which the gift tax exemptions in $14,000.
Obamacare Mandate
The Senate bill also includes a recommendation from President Trump to eliminate the Obamacare tax mandate, which is an especially regressive tax.
“Currently, the law requires every working-age American to buy health insurance — or pay a penalty equal to 2.5% of household income or about $700, whichever is greater,” U.S. Sens. Pat Toomey, R-Pa., and Tom Cotton, R-Ark., wrote last month at FoxNews.com.
“Almost 6.7 million households were forced to pay the penalty last year,” they added. “Nearly 80% of Americans who paid the penalty last year made less than $50,000.”
Even some Democrats support this middle-class tax relief, given that 66% of Americans also oppose the mandate. You could keep your Obamacare coverage if you want it, but you would no longer be forced to purchase it.
Is It Fair?
While it’s difficult — perhaps impossible — to accurately calculate the net effect of tax reform on taxpayers in each income group, there’s some credence to the claim by liberals that tax reform will benefit primarily the wealthy.
But keep in mind that half of America pays little or no income taxes. How do you cut taxes for those who don’t pay taxes? Meanwhile, as we’ve noted, the top 1% of American earners earned 19.04% of the country’s gross adjusted income, but paid 37.8% of income taxes in 2015, based on IRS statistics reported by the Tax Foundation.
Tax cuts should benefit middle-class taxpayers, but they will necessarily also benefit the wealthy. The key is to eliminate some of the deductions paid by the wealthy. Billionaire George Soros, for example, recently avoided taxes on $18 billion by donating the money to his Open Society Foundations. Other billionaires have, likewise, poured money into foundations that often benefit themselves more than others.
Regardless, Kotlikoff’s computer model shows that proposed tax reform would benefit just about everyone to some degree. His Fiscal Analyzer includes 20 federal and state business and personal taxes, as well as transfer programs (food stamps, welfare benefits). It also takes full account of all net taxes, including estate taxes.
“In short,” he write, “the Fiscal Analyzer assesses fiscal progressivity and spending inequality based on what economics actually says, not what politicians are used to hearing.”
Running the new tax plan through the Fiscal Analyzer, and assuming a 5.5% increase in workers’ wages, Kotlikoff wrote that the new tax law would make little difference to spending inequality or net tax rates.
However, he added that, “Spending shares and tax rates are important, but not as important as the rise in earning and spending. The Fiscal Analyzer shows a 2.2% rise in remaining lifetime spending for the bottom quintile followed by increases of 5.4%, 6.3%, 6.5% and 7.2% for the next four quintiles. The rise for the top 1% is 7.1%.”