Does the 2017 GOP Tax Cut Plan Help Middle America? (Senate passes their version 12/2/17 - headed toward Conference)

Updated on December 2, 2017
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My Esoteric spent 20+ years as a DoD Cost and Economic Analyst as well as a program manager of the Air Force Total Cost of Ownership MIS.

A Little History

The GOP has been wanting revamp the income tax, both personal and corporate, for 8 years. Their original, public intent was to do a total rewrite of the tax code, slashing rates and obliterating loopholes while making it business friendly. Now that Republicans control the House, Senate, Executive, and Judicial they have their chance. Since they passed a budget that authorizes "fast track", they can pass it with no help from the Democrats. Consequently, the GOP owns all possible outcomes, whether it helps America, hurts America, or they fail to pass it at all.

Previous tax "reforms" generally looked at personal income taxes and other related taxes such as the estate tax. This go-around considers this again but also is intended to revamp business taxes as well. In total, the previously anti-debt GOP plans on increasing the national debt by around $1.5 trillion. They are gambling on two things to make this work; 1) new economic growth resulting from tax cuts to make up the difference and 2) businesses reinvesting their new found wealth rather than passing it along in executive raises and dividends. As we will see later, those are very problematic assumptions. Now let's look at what they are offering by starting with personal taxes

Competing Plans

The House has passed on party-line votes (13 Rs voted no) their tax plan and are now awaiting the Senate to do the same. The Senate, on 12/2/17, voted to approve their version (nobody is quite sure yet what the final bill will really look like) on a straight party-line votes (51-49), with only on Republican, Sen Bob Corker (R-TN), voting No because the bill increases the debt and deficit too much. There are striking differences between the two versions and must be resolved in Conference over the next couple of weeks. The conundrum is if the House doesn't cave in completely and not accept the Senate version in its entirety, one of two things might happen: 1) the Senate will not be able to hold on to its 51 votes or 2) they lose their "fast-track" authority.

In any case, here is what the two versions look like.

The Two Faces of the GOP Tax Plans

ATTRIBUTE
GOP - HOUSE
GOP - SENATE
Repeal of ACA personal mandate
No (but want it)
Yes
# of Tax Brackets
5 (one of them is a gimmick to hide a tax increase) - Permenent
7 - Expires in 2025
Personal $6,250 Exemptions including for blind and age
Eliminated
Eliminated
Standard Deduction
88% (Single and Married) to 91% (Head-of-Household) increase from current amount
85% (Single and Married) to 92% (Head-of-Household) increase from current amount
Family Tax Credits
Increases Child Credit from $1,000 to $1,600 and creates a family credit of $300 (single) or $600 (couple) which expires in 2023
Increases Child Tax Credit to $2,000 and creates a $500 credit for qualified dependents. Increases the threshold where these credits phase out for the wealthy
Deductions to Adjusted Gross Income: Alimony, Student Loan Interest, Tuition and Fees, Teachers Out-of-Pocket expenses, Employer Provided Education
Eliminated
Keeps most of the education related deductions
Medical Expense Deduction
Eliminates
Keeps
State Tax Deduction
Eliminates
Eliminates
Property Tax Deduction
Keeps up to $10,000
Eliminates
Mortgage Interest Deduction
Capped at $500,000
Capped at the current $1,000,000
Charitable Deduction
Keeps
Keeps
Adoption Tax Credit
Keeps
Keeps
Estate Tax
Doubles Lifetime Exemption and Eliminates entirely in 2024
Doubles Lifetime Exemption
Alternative Minimum Tax (makes wealthy pay some taxes)
Eliminates
Eliminates
Corporate Tax Rate (current "effective tax rate is currently about 18.6%)
Reduce the 35% rate to 20% starting in 2018
Reduce the 35% rate to 20% starting in 2019
"Pass-through" Tax Rate for other businesses
Tax 1st $75,000 (for owners making $150,000 or less) at 9% and then increase to 25%. For all others, tax at 25% vice the current max rate of 39.6%
Lower the tax rate from 39.6% to 17.4% for certain industries
Repatriate Oversea's Cash @
14%
10%
TABLE 1

Repeal of Obamacare Personal Mandate

This is another GOP effort to kill Obamacare given their failure to do so by direct vote. This provision in the Senate bill (which would be adopted by the House if it goes to conference) is particularly nasty for middle class exchange participants who don't qualify for subsidies. The CBO estimates this one feature will increase insurance premiums 10% per year. It doesn't impact lower income earners because the subsidies will increase (more cost to the tax payer) accordingly.

Those who win are people who don't want insurance but are unable to afford medical care when they need it (more cost to the tax payer). The losers are healthy people who want insurance but will be priced out of the market because of rising insurance premiums as well as the sick who still can't afford the higher prices even with the help of subsidies.

It is this last group where much of the $338 billion "savings" come from, lower subsidy costs for those who need but can no longer afford health insurance. The CBO estimates 13 million people will give up being insured, most of those are ones who need it, want it, but can't afford it.

ANWAR Pork

In order to buy Senator Liza Murkowski's (R-AK) vote for the Senate tax plan, they have included opening up the environmentally sensitive Arctic National Wildlife Area Refuge (ANWAR) to oil and gas drilling; something she dearly wants. Apparently, Murkowski also, in spite of her vote against Obamacare repeal, she doesn't appear to have a problem with repealing the individual mandate in spite of the 15 million people who will lose their insurance.

The Goal

The deficit averse GOP have a plan ... increase the deficit (and debt) by $1.5 trillion over 10 years. That way they can afford their tax cuts (most of which goes to the wealthy and corporations). The reason the $1.5 trillion is so important is that if they increase the deficit by more than that, they lose their "fast track" authority and therefore must have Democratic support to pass any tax measure. Now you can see why kicking 13 million people off insurance by repealing the individual mandate is OK in their book, it gives them a $338 billion cushion.

With the good comes the bad. Several GOP senators are known as "deficit hawks". These are lawmakers who feel very strongly that anything passed by Congress should not increase the deficit. Senators Bob Corker and Jeff Flake fall into this category. Corker has said that "if the deficit is increased one dime by the tax cuts, he won't vote for it". Only time will tell.

The Bottom Line First

The Tax Policy Center1 estimates that overall, the House Tax Cut and Jobs bill will end up with most people seeing an after-tax increase, albeit minuscule for the vast majority of Americans.

Table 2 makes this clear.


1 The initial report issued Nov 6 included an error in modelling the Child Tax Credit. It was retracted and a corrected version (little changed from the original) was issued which is what is used here. Embarrassing yes, but it happens. The only people who will take issue are those who don't like the final conclusions.

Who Benefits From the House Plan?

INCOME BRACKET
PERCENT INCREASE - 2018
PERCENT INCREASE - 2027
Lowest Quintile
0.4
0.1
Second Quintile
0.9
0.1
Third Quintile
1.4
0.5
Fourth Quintile
1.7
0.7
Top Quintile
1.9
1.3
80 - 90%
1.6
0.4
90 - 95%
1.3
0.2
95 - 99%
2.0
1.4
Top 1%
2.4
2.6
Top 0.1%
2.5
3.0
TABLE 2 - A Fare System Would Have All the Percentages the Same (Bold is Middle Class) COURTESY of the Tax Policy Center http://www.taxpolicycenter.org/simulations/house-tax-cuts-and-jobs-act-passed-ways-and-means-committee-nov-2017

HOUSE
The reason there are two sets of numbers is the House's version has several parts that expire, mainly the new Family Tax Credit that expires in 2024. It should be clear the House plan for individual taxes is heavily skewed toward the highest income earners. While everybody gets a "tax break", most won't even notice it. If fact, in 2018, 7% of all tax payers get a tax increase. And by 2027, that number jumps to a whopping 24%!

These results agree with the non-partisan Joint Committee on Taxation.

SENATE

The Senate plan also has things that expire ... primarily the tax cuts themselves. They expire in 20261. Like the House bill, the Senate bill fulfills the GOP pledge give the middle class a tax break ... for a while anyway. Donald Trump promised again recently that "We're going to give the American people a huge tax cut for Christmas". Well, it probably won't happen by Christmas and it will only be huge for the very rich Americans.

It fulfills the GOP pledge by giving most Americans some sort of tax cut the first few years, some of which go to the middle class but most go to the rich. This plan is even worse than the House version because the Tax Policy Center estimates that the tax cuts will start in 2019 but that 9% of Americans will see a tax hike (compared to the House's 7% who get a tax hike). By 2027, an amazing 50% of Americans will be paying more in taxes. How is this a good thing?

For example, someone who earns $25,000 will see, on average, a $50 cut in 2019. The middle class might get $850 while people making $746,000 will have their income increase $34,000. Also, one of the assumptions the GOP rely on is that their tax plan will spur economic growth. The TPC does estimate an economic spurt, but only to the tune of $169 billion over 10 years; far short of the $1.5 trillion they need2.

Bottom line and to answer the title's question - the GOP tax plan is a tax cut for most of the very rich, a small tax cut for some middle class, and a tax hike for everybody else.


1 To prevent the deficit and debt from blowing up.

2 They hope to get another $338 billion from taking 15 million people off of insurance.

Eliminate the Personal Exemptions

Each person and dependent can claim, in 2016, $4,050 as a deduction against adjusted gross income. To offset this, both the House and Senate tax plans increase the Standard deducing between 85% and 92%, depending on filing status and which plan you are considering. When added with the increased child tax credits and family credits (one version is just temporary) then the sum about offsets the loss of the personal exemptions.

The catch is that as the number of dependents a family has, the worse things get, tax-wise. Why? Because after the beneficial effect of almost doubling the standard deduction is accounted for, the difference between the exemption ($4,050) and the child and family tax credits ($2,500 using the more liberal Senate version) keeps eating away at any tax savings. This is a clear disincentive for having large families which has bad unintentional long-term consequences for economic growth.

Doubling the Standard Deduction

The tax writers hope to counter the tax increasing aspect of eliminating the personal exemptions by almost doubling the Standard Deduction. Table 2 presents these numbers.

Standard Deductions

FILING STATUS
CURRENT DEDUCTION
HOUSE DEDUCTION
SENATE DEDUCTION
Single
$6,500
$12,200
$12,000
Single, Filing Head of Household
$9,550
$18,300
$18,000
Married, Filing Jointly
$13,000
$24,400
$24,000
Additional Deduction for Over 64 or Blind (up to 4)
$1,250 per occurrence for married and $1,550 for single
$0
$1,250 per occurrence for married and $1,550 for single
TABLE 3

The changes to the Standard Deduction serve two purposes. One is to partially make up for the elimination of the personal exemptions and the other is to reduce the number of people who file itemized returns. Unquestionably the second purpose will be realized in spades.1

One feature that is often overlooked in the rhetoric about the House tax plan is the elimination of the standard deduction for being over 65 and/or blind. Depending on filing status, the deduction is worth $1,250 or $1,550 per occurrence. For example, in my family, we are both over 65 years old and would have qualified for an additional $1,250 each for a total of $2,500. In my case, it doesn't matter because we itemize, but under the House version, we will not be. Therefore, if that item makes it through conference, my wife and I will be out $2,500 and pay a little higher tax because of it. Is this what the GOP means when they say "everybody" gets a tax cut?

I guess that is different than Obama saying "you can keep your doctor".


I'll be back tomorrow to pick up where I left off.

1 One benefit from this which I haven't heard touted is this should significantly reduce the IRS's workload and, one would think, staffing.

What Does the GOP Really Want With this New Tax Plan?

Right now, it seems, their main concern is to pass something, anything, to show they know how to govern. Snarky, I know, but when you listen and read their rhetoric about having to pass Obamacare repeal, they said nothing less than this. For example,

What Do You Pay Now?

Table 4 is the current structure for personal income tax. There are seven brackets where, as adjusted gross income goes up, the marginal tax rate goes up as well. The maximum is set at 39.6% for those earning more than $470,700. That rate, however, is not the actual rate that is paid.

You will notice the right-most column labeled "Effective Tax Rate". This the tax rate that is paid on the total adjusted gross income. As you can see it is, in all cases except one, lower than the marginal rate. This is an artifact of this type of structure.

For example, even though most people think millionaire is supposed to pay 39.6% of their income in taxes, they don't. Instead, the real rate is more like 29%, quite a difference.1 It work likes this: the first $18,600 a millionaire earns is taxed at just 10%. The next $57,250 is taxed at 15% and after that the following $77,200 has a rate of 25%. And so it goes until you get to $470,701. That extra dollar over $480,700 is taxed at 39.6%. That is why the "effective" tax rate for the wealthy is 28.6% and not the higher rate that many think is the case. It is this structure that the House tax writers hope to simplify and provide a tax break to all income brackets.


1 In reality, the more a person earns in excess of $470,700, the closer their effective rate approaches, but never equals, the top rate of 39.6%

`2017 Income Tax Brackets

RATE
BRACKET - (Married, Filing Jointly)
Tax on Top of Bracket (or $500,000)
EFFECTIVE TAX RATE
10%
$0 - $18,650
$1,865
10%
15%
18,650 - 75,900
10,453
13.8%
25%
75,900 - 153,100
29,753
19.4%
28%
153,100 - 233,350
52,223
22.4%
33%
233,350 - 416,700
112,728
27.1%
35%
416,700 - 470,700
131,628
28%
39.6%
470,700 +
143,231
28.6%
TABLE 4 - Tax is based on "Taxable Income" which is income after exemptions and standard or itemized deductions but before any other credits

What Will You Pay Under the House Tax Plan?

Table 5 presents what the House GOP is proposing. They shrink the number of brackets from 7 to 5. They will tell you, however, there is only four brackets, but that is not true. In fact they have a fifth one, the 45.6% rate. This is called a "bubble" rate and is there because the GOP doesn't want to say they really Raised taxes on the wealthy for $200,000 of their income. But weather it is hidden or not, $200,000 of income will be taxed an extra 6%.

The reason it is there is to take away the benefit the rich get by having part of their earnings taxes a much lower rates. This bracket is to "claw back" some of that windfall. But it is only on $200,000 of their earnings. After that the rate drops back down.

GOP Tax Brackets - House

RATE
BRACKET - (Married, Filing Jointly)
Tax on Top of Bracket (or $1,500,000)
EFFECTIVE TAX RATE
12%
$0 - $90,000
$10,800
12%
25%
90,000 - 260,000
53,300
20.5%
35%
260,000 - 1,000,000
312,300
31.2%
39.6%
1,000,000 - 1,200,000
391,500
32.6%
45.6%
1,200,000 - 1,400,000
482,700
34.5%
39.6%
1,400,000 +
522,300
34.8%
TABLE 5 - Tax is based on "Taxable Income" which is income after standard or itemized deductions but before any other credits (note, there are no exemptions in the GOP tax bill)

GOP Tax Brackets - Senate (2018 - 2026; reverts back to 2017 rates after 2026)

RATE
BRACKET - (Married, Filing Jointly)
Tax on Top of Bracket (or $1,500,000)
EFFECTIVE TAX RATE
10%
$0 - $19,050
$1,905
10%
12%
19,050 - 77,400
$8,907
11.5%
22%
77,400 - 140,000
22,679
16.2%
24%
140,000 - 320,000
65,879
20.6%
32%
320,000 - 400,000
91,479
22.9%
35%
400,000 - 1,000,000
301,479
30.1%
38.5%
1,000,000 +
493,979
32.9%
TABLE 6 - Tax is based on "Taxable Income" which is income after standard or itemized deductions but before any other credits (note, there are no exemptions in the GOP tax bill)

Does The GOP Achieve Their Goal of Reducing Taxes on the Middle Class?

At first blush, it would seem so. I had prepared a couple of tables to show why this appears so, but the Tax Policy Center's analysis makes a clear case that in the first couple of years, most (but not all) taxpayers in all tax brackets will see a cut in their taxes and somewhere between a couple of bucks to tens of thousands of extra dollars in their pocket. The lower three income quintiles will see the "few bucks" while the top two will see the "tens of thousands of dollars". (My family, on the other hand, will see a tax increase from the get-go; I'll get into why a bit later.)

After the first couple of years, because various aspects of each house's plan begin to expire. As mentioned before, to make the Senate plan stay within the fast track guidelines, they had to cancel their tax cuts after 2026 so as not to balloon the deficit. That is why the TPC estimates, if the Senate plan is enacted, 25% of tax payers in the lowest four quintiles will see more taxes after 2026.

It seems to me this is NOT what the People had in mind when they gave Trump and GOP total control of the government.

Itemization is on the Chopping Block

One of the goals the GOP as put out their is to simplify the filing of taxes so that most filers can submit just one piece of paper (they hold up a postcard showing how simple it will be) to file their taxes. Unfortunately, that is what in advertising and the law is called "puffery", similar to President Obama's declaration that "you can keep your doctor".

The people who will likely pay more taxes from the start are the ones who formerly itemized and now will not. As I mentioned early, my wife and I are two of those people. Either the House or Senate plan will stop me from being able to itemize my deductions. They are going to replace it with a $12,000 increase in my standard deduction ... which is a few thousand dollars less than what I itemized. To add insult to injury, we are both over 65 which means we lose the old person's standard deduction of $1,250 each (if we were blind, there goes another $1,250 each). On top of that, I will lose a substantial deduction for the alimony I pay.

Consequently, I will pay quite a bit more in taxes than I do now. How many of you have similar circumstances.


Alternative Minimum Tax (AMT)

This feature was originally instituted to make sure the very wealthy paid some taxes (many used loopholes to avoid all taxes). Over time this law started impacting taxpayers of more modest means because it wasn't linked to inflation.

Both the House and Senate bills repealed this provision, which will allow the very wealthy avoid more taxes. The Senate, in its rush to find 50 votes, dropped this repeal in order to find more money to pay for other changes included at the last minute to "get to yes" for certain Senators. This now becomes a point of contention during conference where the House and Senate hash out their differences.

Corporate Tax Reduction

Even though the effective tax rate on corporations is less than 20% in spite of the "official" tax rate of 35%, both the House and Senate have reduced the top rate to 20%. Both versions make this tax cut permanent but the Senate has it taking effect in 2019 rather that 2018 as in the House.

This feature is where about 2/3 of the $1.5 trillion cost comes from. The reason the Senate pushes off implementation is to keep the total cost below this number. It would seem the House will have to give on when the cut starts because if they don't, the Senate loses its "fast-track" authority.

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    • Larry Rankin profile image

      Larry Rankin 2 weeks ago from Oklahoma

      Great read.

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