Tax Reform

What’s the issue? Last Thursday, House Republicans passed a budget blueprint that will allow them to pass tax reform with only a simple majority (aka, no Democrats). Republicans now hope to unveil, understand, vote on, and pass tax reform (which will affect every taxpaying American and American business) in both the House and the Senate before Thanksgiving.

Why do I care? It may seem like tax reform isn’t as critical or as interesting as many of the other issues I’ve profiled on this blog like safe abortion, gun violence, or the opioid crisis. Believe me, I wasn’t super excited about writing this blog either. But the fact is that we live in an extremely unequal world, and the gap between the extremely wealthy, the wealthy, the middle class, and the poor just keeps growing. This economic inequality, of course, is very linked to many of the other issues I talk about on this blog. And in the United States, economic inequality is tied to racial inequality as well. 96.1% of the wealthiest 1% of Americans are white. Meanwhile, a typical black American household has only 6% of the wealth of a typical white American household, and a typical latino American household has only 8%. That means that when we talk about giving tax cuts to the wealthiest Americans, we are largely talking about giving tax cuts to white Americans as well. Taxes are not the only, or the best, way to attempt to mitigate some of this inequality, but it is a place to start.

In addition to facilitating some light income distribution, taxes fund our government. We need this money to fund our infrastructure and our safety nets. Government programs like Medicaid, food stamps, and public education help guarantee that all Americans receive medical care, food, and education. This safety net also helps alleviate the most extreme forms of economic inequality, by giving those with the least income access to basic services.  Many of these things are already facing funding cuts and neglect from the administration, and would likely be among the first to receive more cuts if the government raises less revenue from taxes.

Okay, so with that in mind, what exactly are the Republicans proposing? Many of the details are still vague, but here are some of the key points of the Republican tax plan, and what they mean:

1. Lower corporate tax rate. The Republicans want to lower the corporate tax rate from 35% to 20% (although Trump initially promised to lower it to 15%). Republicans say that the United States has the highest corporate tax rate in the world. It is true that the stated (or statutory) corporate tax rate in the United States is higher than most other countries, but after loopholes and deductions, the actual rate that most corporations end up paying (the effective tax rate) is in line with what corporations pay in the rest of the world.  So, who benefits? The direct beneficiaries of lower corporate tax rates are business owners and shareholders. Some benefit would probably also go to the workers, who could benefit from added investment the corporation would make with its savings. Most economists say about 75% of the benefit would go to the shareholders.
2. Repatriation tax. Overseas assets of American companies would get a tax holiday and be repatriated after being taxed at a low rate (probably about 10%). This strategy has been tried before and didn’t work. Instead of bringing money back to the US and stimulating investment, corporations used the money to increase shareholder value. Corporations may also be incentivized to invest more money overseas, counting on another tax holiday in the future to bring it back. So, who benefits? Mostly giant corporations with lots of overseas assets who have spent the time and money to figure out tax havens overseas, like Apple and Google.
3. Increased standard deduction. The Republican plan calls for three tax brackets (down from seven), but doesn’t specify the income levels of each one, so it’s impossible to know whose tax rate would go up or down. However, the lowest tax bracket is 12%, which is above the current lowest bracket of 10%. Republicans claim that this increase for the lowest earners will be offset by an increased standard deduction. This is disingenuous because the tax reform would also eliminate most itemized deductions (it would not eliminate the mortgage interest deduction, which I’ve written about before). So, who benefits? It’s unclear, but there are some red flags. If you pay the mortgage interest deduction (as in, you have a mortgage), then you will likely pay more (because you won’t get to take the standard deduction). If you have children, it’s unclear if you’ll benefit because the plan will get rid of the exemption you can take for your children, but it will also increase the child tax credit (by an unspecified amount). If you currently take other deductions in addition to the standard deduction, these would be rolled up into only the standard deduction under the Republican tax plan. All of these factors make it less likely that you’ll benefit from the increased standard deduction.
4. Repeals the alternative minimum tax. The alternative minimum tax requires you to pay the higher rate of either a) what you would pay after taking all of your itemized deductions or b) the alternative minimum tax. So, who benefits? The very rich. 29% of households with income between $200-$500k will pay the alternative minimum tax, along with 62.9% between $500k-$1 million. Incidentally, Trump’s own tax returns show that in 2005 (at least) he paid millions more as a result of the alternative minimum tax.
5. Eliminates the State of Local Tax Deduction (SALT). This benefit allows taxpayers to deduct the amount they paid in state and local tax from their federal tax returns. This is also one of the most controversial pieces of the current tax proposal among Republicans themselves. Eleven of the 20 Republicans who broke rank to vote against the budget blueprint are from New York and New Jersey, two of the states most affected by SALT. So, who benefits? Republican lawmakers who can use this added revenue to help offset some of their tax cuts for the rich. The losers are mostly taxpayers from states with high taxes, which are more likely to be Democratic.
6. Eliminates the “death tax.” Right now, when someone with a lot of wealth dies, his or her estate is taxed as it is passed down to his/her heirs. The Republican plan would allow this passing down of wealth to occur tax free, thereby perpetuating the advantage to being born into a wealthy family. So, who benefits? Families with an estate valued at over $5.49 million.

And also… What about my 401(k)? You may have heard that Republicans are considering lowering the amount of pre-tax dollars you can put into a 401(k) or seen Trump’s angry tweet suggesting he would support nothing of the sort. So why do Republicans want to tax your retirement savings? This is actually another budgetary trick. They raise more revenue now, while you are saving for retirement, at the expense of being able to tax it later, when you spend it during retirement. This is all part of the wishful accounting they are using to make the tax reform appear to add less than $1.5 trillion to the deficit over the next decade and thus able to be passed by a simple majority.

Many Republicans will argue that cutting taxes for the rich actually benefits the middle class because it encourages the richest to invest and grow the economy. However, an analysis of top tax rates since 1945 shows that this isn’t true, and in fact cutting taxes for the wealthy has a negligible impact on the economy. So even though we don’t know all of the details of the Republican tax plan, I hope it’s clear that we know enough to see that at the very least this bill needs careful consideration and debate, not to be shoved through Congress as fast as possible. Unfortunately, thus far, according to Republican Representative Matt Gaetz of Florida, Republicans have been “asked to vote for a budget that nobody believes in so that we have the chance to vote for a tax bill that nobody’s read.”

What you can do if you care too:

1. Call your Congresspeople. Let them know you’re paying attention to tax reform and that you don’t buy the line that it’ll be beneficial for the middle class.
2. Follow the tax reform debate. The Republicans in the House plan to unveil their bill on Wednesday, November 1st, and if they want to pass it by Thanksgiving, things will move speedily from there. Don’t get discouraged by the tax legalese- refer to my breakdowns of the major issues above, and if you still have doubts, do a little research!
3. Attend your town hall meetings and ask about the tax plan. You can find a town hall near you here.
4. Vote! Although it’s an off year, several states are having mayoral, gubernatorial, and local elections on November 7th. Check here to see what’s on the ballot where you live.
5. Raise awareness. Write a letter to the editor or an op-ed in your local paper; talk to your friends and neighbors about what the tax plan means for them. If it becomes political unviable, Republicans are less likely to pass it.