I want to share my perspective on various aspects of the bill. This blog post is not a comprehensive analysis, but I do hope it adds a bit of insight.
Tax is not just a way to collect the funds for the government. It can also be a way to shape policy. For instance, giving a deduction for children is a way to encourage families to have children. Giving a deduction for mortgage interest could stimulate home ownership.
I believe there were actual policy changes that influenced the structure of the tax bill. For various reasons (probably political) they have not been articulated.
Deductibility of State Tax (income, property and sales tax)
The tax bill sought to eliminate the deductibility of state taxes, but because of a lot of pushback, a deduction of up to $10,000 for any combination of these taxes was preserved. Most taxpayers were no itemizing deduction and did not take advantage of this deduction. With the increase in the standard deduction to $24,000 less than 20% of taxpayers will take advantage of this deduction. Note that those taxpayers that have been paying Alternative Minimum Tax have not been able to deduct state taxes.
I believe that it does not make sense to have a tax deduction for state taxes. Some states have very high tax rates for various reasons. If California wants to spend money to provide health care services to the poor (which I believe in), I don’t know why citizens of Florida would have to pay for part of that. However, that is what happens when you allow for the deduction of the state taxes.
Before the tax bill, interest on mortgages for personal residences (up to two) could be deducted up to a million dollars. So if you ad a mortgage of $1 million or more, and the interest rate was 4%, you could deduct $40,000 from your income. If you were in a 40% marginal bracket, this would reduce your tax by $16,000. The majority of taxpayers did not get a deduction even if they had a mortgage because they used the standard deduction. The doubling of the standard deduction will reduce the number of people deducting montage interest. The drafters of the bill probably wanted to eliminate all future mortgage interest deduction, but lobbying from the builders and real estate agencies made that unlikely. They ended up reducing the deduction by 25% by limiting the interest to a $750,000 mortgage. In my example above, this could result in someone paying an additional $4,000 in tax. I am in favor of eliminating the mortgage deduction.
The Affordable Care Act requires everyone to have health insurance or pay a fine. The purpose of this was to encourage young and healthy people to buy medical insurance even if they did not feel they needed it. The result of having a pool of young and healthy people was to bring down the premiums for the others. This requirement to buy medical insurance or pay a fine was in effect a tax on these people. It has been eliminated. I agree with that, but I have to say that I believe in a single-payer solution or what is sometimes called Medicare for All. There were government subsidies associated with this so eliminating this provision brought down the amount of the deficits caused by the tax bill.
The Estate Tax
The Republicans hate it on a matter of principle. Before this bill, about $11 million could be left tax free by a couple. This bill doubled that amount to more than $22 million. Like many provision in the bill, there is a reset after eight years to game the rules of the Senate and pass the bill with only a simple majority vote. However, they also changed the gift tax rules. Up to $22 million for a couple can be gifted before the estate tax returns to the $11 million. There will be many ways to deal with the estate tax coming back down by using gifts. One can set up a trust where the principle is gifted, but the earnings are provided to the person giving the gift as long as they are alive. I have already been contacted by my estate attorney about this. Not too many estates paid the tax in the past. Either they were too small, or those the person living the estate had found ways of getting around the estate tax (and there are many). I am sure the drafters of the bill wanted to eliminate it 100%, but the optics of this would be ugly and anyway, the really rich don’t care as they have already figure out how to get around the tax.
They kept the rule about basis step up. What that means is if you bought an asset for $1 million that was now worth $10 million and you die, the basis is stepped up to $10 million, and no tax is due on the sale. However, if you sold it before dying, you would have had to pay capital gains on $9 million. The step up is very significant. If you have, let’s say, a real estate asset like an apartment building, that has appreciated, you may want to refinance it so that you can get at some of the cash without having to pay capital gains.
Change in Corp Tax Rate
The marginal rate of tax paid by C Corps has been changed from 35% to 21%. The policy here is that the USA tax rate is one of the highest in the world and makes the USA noncompetitive concerning other countries. If the tax rate is lowered, USA companies will expand more in the USA thereby creating jobs for American workers. Also, the reduction in tax will increase earnings and allow American companies to invest more in the USA. Frankly, while I think the authors of the bill believe it will. I do not. I don’t think USA companies pay 35% after deduction and tax credits. Considerations in addition to tax drive foreign investment. Investment by many corporations is not limited to their earnings. Most likely will just use the extra money in nonproductive ways like buying back their stock.
Changes in Pass-Through Corporations ( S Corp and LLC)
The idea here is to give them about the same break to Pass Through Corps as to C Corps. But it does it by eliminating the 20% of the gains. That means the tax rate is reduced to a bit less than 30% versus the new top tax rate of 37%. However, there are many limitations on this exception. I also do not believe this will lead to any substantial job growth.
Increase in Standard Deduction
The policy here is to reduce the amount of effort to file a tax return. I think it does that. Many people already use the standard deduction and much more will use it now that it has been doubled. However, it will be difficult for many taxpayers to know if they are better off using the standard deduction or making itemized deductions. I bet that many will still pay to have their taxes done to determine this.
There will be an effect on charitable giving. If you use the standard deduction, you can not deduct the donations. The result may affect the amount people donate. Some people are considering bunching up their donations. They would take the standard deduction one year, and the itemize the next year. They would make their donations in the years when they are itemizing. This is particularly smart if you use donor-advised funds.
It will also have the effect of making homeownership more expensive since one can not take the mortgage interest deduction if they utilize the standard deduction.
The majority of the tax reduction is going to high and ultra-high earners. The argument is that they pay the majority of tax so they should get the majority of the reduction. There are two issues with this. First, they are getting more than their percentage share of the tax cut and also there is no reason that they should get a proportional share in the first place. The top 1% is doing amazingly well with the current tax rates and has been continuing to increase their share of the nation’s wealth. Providing this money to the rich will not grow the economy. How many homes, yachts, airplanes and valuable piece of art can you have? All that happens when people who have more money than they need, get it is that they invest it and not always in the USA. I can speak from my own experience. Half of my investments are outside of the USA. What is worse is that when there is an overabundance of money to invest, the prices of those assets increase. When I buy stocks, for instance, I am usually not buying from the company. Instead, I am buying from someone that owns the stock, and I have to give the person a reason to sell. I see no way that these tax savings are going to trickle down to the average worker. Many in the top 20% are hurt by the tax changes depending on in which state they live. They are also still subject to AMT. But once you earn more than a million dollars, you probably are no longer in AMT. You are not hurt very much by the reduction in mortgage interest because you have been buying homes that cost a lot more than the previous 1 million dollar mortgage cut off. You have probably figured out in the past how to get around property tax and state income taxes.
The Carried interest Loophole which allows fund managers to get long-term capital gains treatment on their earnings was kept.
Republicans were the only ones to vote for this bill. It had to pass with a simple majority to be subject to reconciliation which I am not going to try to explain. But to do that they had to meet the deficit below $1.5 trillion dollars over ten years. To do that, they had to make the tax deductions for individuals expire in ten years. They assume that in the future it will be extended, so this is just gaming the system.
The Republicans claim the deficit will not happen as the bill will stimulate growth in jobs and wages and will end up paying for itself. This result has never happened in the past as far as I know and I don’t believe it will happen now. The way to accomplish this would have been a massive infrastructure bill that would have dealt with the sad state of our bridges, roads, trains, and airports along with a massive push in renewable energy. Reducing the payroll tax would also put money in the hands of those that would spend it to buy things and thus create jobs.
I do believe that many of the Republicans do think that this tax bill will accelerate economic growth They’re wrong.
When the Republicans say that this is a Middle-Class tax reduction bill, they are not telling the truth. So we are making the rich richer while poor children die for lack of healthcare. Our infrastructure is falling apart and the average person is seeing their dreams for their children destroyed while the politicians server their masters and protect their jobs so they can cash in later. And they do all of this on the credit card of the USA which will have to be eventually paid off by our children and their children.
Republicans are pushing the nation ever farther into a bigger and more unequal oligarchy! It is truly tragic particularly when combined with their scorched Earth policies on the environment and war…. A very distopian society.
thank you for the analysis Avram.
Thanks for your comment, Flavia. I agree but I would also like to point out that ultimately, there will be negative consequences for everyone, even the rich. It is pretty much an insane policy.
Your statements “the majority of taxpayers” are quite naive. For example, “do not itemize”. This is classic moron GOP ruse.
Roughly speaking, only the top half of tax filings represent real adult full-time work income.
I have filed taxes since at least 14 years old. And every year in college. Note that one pays 12.4% effective FICA on the first dollar as a 14 year old umpire or ice cream kid.
Course that’s why Tax liars like Paul Ryan, Mitt Romney and Grover always say “Federal Income Taxes”. Bc if they just said “taxes” the picture would skew to the burden on lower end workers. Nice to lie and pretend you care eh? Quality people.
Mitt Romney told so many self-serving lies “that moneys has already been taxed”. (At 0% Mitt? You’re an asshole moron.)
Here’s another Mitt Romney classic, “47% of people pay no Federal Income Tax – (despite paying a higher FICA % than many billionaire tax rate) – therefore I cannot win their votes”.
DUDE ALL THE ZERO TAX PEOPLE VOTE GOP! You’re a dummy. There are red state lower income brackets, the elderly, the ex-military. The guy is just not bright.
MSJ, thanks for pointing out the this discussion does not really deal with payroll (FICA and Medicare) paid by employees. This is a large burden on low income. I did point out that it would be better for the economy to reduce this burden to stimulate growth then to have an income tax cut.
A very similar good summary =
MSJ, this is indeed a great summary especially with respect to business tax. I learned a few things. I was not trying to summarize the tax bill as many others have already done that. I was trying to discuss the motivations.
Thanks for the responses. I really like your piece and your blog. The human side, your authentic view is the best part. Sorry I pick on a few spots. I am a refiner. I wish more smart cats would do something similar (or maybe good stuff is simply hard to discover). Here is one odd hidden blog I love: https://blog.bolt.io
Avram, your analysis is, as always, thoughtful and incisive. While I might quibble with you over a point here or there, there’s one comment I feel misses the mark: “If California wants to spend money to provide health care services to the poor (which I believe in), I don’t know why citizens of Florida would have to pay for part of that.”
This doesn’t take into account the fact that states with substantial state and local tax are largely donor states. That is to say, they pay more in federal taxes than they receive back in benefits. They are already paying a disproportionate amount WITH the ability to deduct SALT. Reducing that deduction will only worsen the imbalance.
Thank Tim for your comments. I understand that the blue states pay more in Federal Taxes than the red states. That has to do with both population and economic development I idea that people with higher earnings should pay more in taxes is fundamental to our progress tax system. There is no concept that they more that one pays the more that one gets back. I for instance, pay a great deal in tax but drive down the same streets as someone that does not even pay tax. We are all defended by the same army. If states like California decided to have high taxes especially for the wealthy (12.9%) that is up to those states. I still don’t understand why someone in Florida should have to pay for someone in CA having the benefits of living in CA.
One other thing to take into consideration is AMT. I for one have not been able to deduct state tax or property for a very long time. The increase in the standard deduction with reduce the number of those taking SALT deductions on the bottom side and maintaining ATM will reduce it on the higher end.
As you probably know, I am left leaning. I also am aware of the ways the wealthy avoid taxes. I would really like to see this changed but nothing in the tax bill deal with that. On the other hand, I think that the tax regulations or way to complex. I think that some Republican started out to make it simpler but then greed got in the way.