There are winners and losers in nearly every endeavor, and never more so than in overhauling the federal tax code. And new rules certainly could create the “giant, beautiful, massive, the biggest ever in our country, tax cut” — as President Donald Trump described the blueprint released last week by congressional Republicans.
It’s certain big changes are needed.
Simplifying the system and lowering the number of brackets would make sense. For the vast majority of taxpayers, figuring out what they owe in taxes should be an easy process that takes into account just a few factors.
For corporations, changes are needed to make taxation simpler and fairer, and to encourage economic growth.
Properly targeted tax cuts would stimulate significant economic growth.
But none of this is simply done. And the GOP plan lacks the details to show whether it would do any of it.
The Republican plan says our seven federal brackets — ranging from 10 percent on taxable income up to $18,650 for married couples to 39.6 percent on income above $470,700 — would become three brackets set at 12 percent, 25 percent and 35 percent. But the ranges of those brackets aren’t yet identified. Without those, analyzing the plan’s impact is mostly impossible.
- There would be at least one definite set of losers: Taxes of lower-earning families with kids would clearly rise — dramatically so in the case of larger families. There also would be one clear set of winners: Wealthy families that now pay estate taxes of 40 percent would see that tax lowered to zero.
So these two proposals, which are explained in the plan, are very bad ones indeed.
The rest of the proposal is so lacking in detail that it’s easier to talk about how to put reform on the right path than debate the unknowns it presents.
- GOP architects say this plan would nearly double the standard deduction of $12,700 for a couple to $24,000. In exchange, the deduction for state and local income and property taxes — critical for New Yorkers — would be eliminated. This is not a fair trade-off, and it’s false advertising, because the plan also would remove the $4,050-per-person tax exemption every household gets. A couple with one child would see their combination of exemptions and deductions lowered by $850, while a family with four children would be taxed on $13,000 more of its income. And that increase would not even include lost deductibility for state income and local property taxes that would crush Long Island households.
Combine this with an increase in the lowest tax rate from 10 percent to 12 percent, and a lot of lower- and middle-income families, large families in particular, would face much larger tax bills.
- Absent a huge rate reduction, the elimination of deductions for state income taxes and local property taxes would devastate Long Island’s taxpayers, home values and economy. Take as an example a couple with two children, with $150,000 a year in taxable income, in the first year of a $350,000 mortgage at 4 percent interest. Their current baseline exemption is $16,200, while their deductions include $7,700 for state income tax, $12,000 for local property taxes and $14,000 in mortgage interest.
Right now, that typical family would owe no taxes on its first $49,900 of income. Under the GOP plan, only its first $24,000 in earnings would be tax-free. Under the current tax rate of 28 percent, that combined loss of exemptions and deductions would hike the family’s federal income tax bill by another $7,252.
The worst pain from changing the rules this way would be felt in high-tax, high-home-value places — reliably Democratic states like New York, New Jersey and California. Those states hold plenty of GOP members of Congress who’d have to answer to taxpayers.
- Our corporate tax rate of 35 percent is too high and loopholes too numerous. Rates on profits U.S. companies earn overseas are unfairly high and unproductive. The proposed corporate rate of 20 percent makes sense — if the law is structured so companies really have to pay it. And the plan to charge a lower rate on foreign profits makes sense, too.
- Tax cuts stimulate the economy if the savings are spent, which happens when poor and middle-class people benefit. It’s less true with cuts that benefit the rich. Eradicating the estate tax, which last year raised $20 billion of revenue from just 5,000 taxpayers subject to it, is wrong. It’s a gift that would likely benefit the president and his family. And eliminating the estate tax while raising rates and eliminating exemptions for the working class is political suicide.
* * *
Every aspect of tax reform is in play, and positive changes could make paying taxes simpler and fairer and leave more money for those who need it. That could grow the economy through consumer spending and corporate expansion. Working together, Republicans and Democrats from blue and red states could craft such a plan. It would be in their best interests, as the nation’s confidence in them is staggeringly low.
It would also be in the nation’s best interest, which ought to be the highest priority.