The stated intent of the new proposed Tax Reform Package is to grow the economy while providing tax cuts and simplification for the middle class. Forget the fact that as the most progressive tax system in the World, our lower and middle classes already carry a substantially smaller tax burden than in any other country. Just note that the principal middle class tax cuts being proposed is simple political theater and do little or nothing to simplify the tax law, grow the economy, or help the taxpayer.
The lawmakers have proposed nearly doubling the standard deduction from $12,700 to $24,000 for married couples and from $6,350 to $12,000 for single filers. On paper, that sounds good. It provides a tax reduction for those who do not itemize their deductions, though it is neutral for those who will continue to itemize. It has no benefit for economic growth – it just reduces taxes owed.
The tax proposal goes on to get rid of personal exemptions. Currently, taxpayers can claim a personal deduction of $4,050 each taxpayer and dependent. The exemption functions just like the standard deduction in that it reduces the taxpayer’s taxable income for the year. Eliminating the exemption would cause a net tax increase to most taxpayers, but the tax writers seem to be trying to offset this by increasing the child tax credit. This credit has the same effect as the exemptions had – that is, to reduce the tax for individuals, with more benefit going to those households with more dependents, and with no additional contribution to the economic growth of the economy. But since credits are always more complicated than deductions in its operation, this swap of credits for exemptions is a change for the worse.
It should be noted that one reason Congress is pushing for the tax credit instead of exemptions is that the credit can be “refundable”. That means that even if a taxpayer has no tax to pay, the credit would be sent to him in a refund. As such, this is not part of our tax structure – it is simply welfare Government spending wrongly dressed up as a tax reduction.
Thus, these changes really don’t simplify the tax code; it merely shifts formulas and amounts around. In fact, since credits are more difficult to implement than deductions, this actually adds complexity to the Tax Code. A far better solution would be to eliminate the Child Tax Credit, and use the standard deduction and exemptions to reduce the tax burden (using exemptions to the extent that you would like to confer a benefit to larger families).