Everyone talks about how true reform of our tax laws should have three goals: 1) equitable; 2) efficient; and 3) simpler. In doing that, many have argued for removing the individual mandate, but at the same time have left in things like charitable deductions, SALT, and the mortgage deduction. This is ludicrous. With those three concepts above, the other provisions need to be addresses, as they are not equitable, efficient, or simpler — they are political. To leave them in, while removing the individual mandate, is illogical.
Richard Rubin makes some major errors in his summation of burgeoning tax bill. He uses a scenario of five people and goes through how they would be affected by the current proposed legislation. However, he does not get his calculations correct. He’s comparing apples and oranges. He’s also not looking at the reasons for the tax law changes and if the changes make the tax law fairer. He’s only looking blindly at how the tax law changes affect the current tax burden of the people. Rubin should have run his article by a real tax accountant before he published his account. From the article, under the GOP plan: “The executive would pay $868,000 in taxes. The manufacturer pays $704,400, but might be able to argue her way into a lower bill. The passive business owner pays $576,000. The dividend-earning investor pays $476,000. The heir to the estate pays nothing. The manufacturer, the estate and the passive owner all get big tax cuts from the GOP plan. The investor and the wage earner generally don’t.”
Now, in this scenario, Rubin doesn’t explain that the the first person — the executive — would remain unchanged; His tax rate is 43.4%, which is a 39.6% rate + 3.8% medicare tax. The manufacturer’s lower tax bill has to do with how flow-through businesses do things, because they are not a corporation. The passive business owner is changed because he pays a new 25% tax rate + the 3.8% medicare tax. The dividend investor pay the $476,000 because he pays 23.8%. It’s a dividend tax. However, what Rubin does not explain is that the dividend investor already paid another tax, a corporate tax, before the dividend was issued. That part of the tax law remains unchanged, and the investor remains unchanged.
The heir to the estate doesn’t pay any taxes because it is not income. Never has an heir paid an estate tax, because it has already been paid.
Rubin is essentially trying to be provocative here by using a $2 million base figure as a means to show a great difference in numbers, when really, this random list of five people makes no sense. The comparisons don’t really compare, such as including some things that are not income items. Rubin needs to be more careful with his writing.
While we’re on the subject of tax reform, one particular item that could be included in the package is the elimination of the individual mandate. Since SCOTUS classified the penalty as a tax, it is one that can be repealed as part of the reform, and would produce an estimated savings of $338 billion over 10 years, according to current CBO figures.
Eliminating the individual mandate would not affect Medicaid or pre-existing conditions; it would simply allow taxpayers to have the freedom to decide if he or she wants to forego insurance without being penalized (taxed) for their choice. According to the Wall Street Journal and IRS data, more than 90% of households who paid the “individual shared responsibility payment” (tax) earned less than $75,000. The tax is essentially a tax on the poor.
Republicans would be wise to repeal the mandate, ease the tax burden on taxpayers, and use the savings gained within the rest of the tax package to strengthen other parts of the reform proposals and provide meaningful relief for all taxpayers.
The GOP Senate released its own version of a tax reform plan with a few differences from the House version. The most notable example is a one-year delay on cutting the corporate tax rate from 35% to 20% — meaning that the tax change would not take affect until 2019.
Their rationale is that the cost of the marginal cut would save $100 billion in costs. One drawback, however, is that companies would likely just sit and wait to make major changes and business decisions. This would certainly delay economic recovery.
In another departure from the House, the Senate bill would eliminate the deduction for state and local taxes (SALT), a move that is positive, yet affects states with high taxes. This was originally in the House bill, but after pushback from places such as New York, California, and other high-tax states, the House modified the deduction to allow a cap of $10,000. This full elimination is really what needs to happen; it puts all taxpayers around the country on a level playing field, especially if it helps to reduce federal tax rates across the board.
The House and Senate also differ in the estate tax. While the House has a plan to repeal the estate tax entirely by 2024, the Senate plan does not. Instead, it will only target a select few taxpayers, by doubling the size of estates that are exempt from being taxed. The estate tax is a punitive tax and really should be eliminated; the House form is much better.
Finally, the Senate bill would lower the top marginal rate by 1%, to 38.5%. While a slight reduction is better than none, neither bill version goes far enough. The final tax reform plan must include a return to at least the Bush tax cut rates (35%) if Congress is serious about really jump-starting the economy.
It will be interesting to see what the final form takes. A true tax reform bill, like the IRC code reforms of 1986, are long overdue. The taxpayer deserves a cleaner, more streamlined tax code.
The Wall Street Journal has done a nice roundup of the October Jobs Report released a few days ago. U.S. employers hired at strong rate in October, reflecting a sharp bounce back from September, when payroll growth slowed in the wake of hurricanes striking the southern U.S. Meanwhile, the unemployment rate fell to a new low for this expansion. Here are some of the key figures from Friday’s Labor Department report.
UNEMPLOYMENT RATE
4.1%
The jobless rate last month edged down to 4.1%, the lowest reading since December 2000. That low rate, however, reflects that fewer Americans were working or seeking work during the month. The labor-force participation rate slipped to 62.7% from 63.1% in September. The prior month’s reading was the highest in years—and the participation rate slipped in October back to a level recorded this spring.
JOBS
261,000
U.S. employers added 261,000 jobs to payrolls in September—the best pace of monthly pace of hiring in more than a year. Employment rose sharply in food services and drinking places, mostly offsetting a decline in September that largely reflected the impact of hurricanes Irma and Harvey, the Labor Department said. Hiring last month also improved in business services, manufacturing and health care.
WAGES
-1 Cent
Average hourly earnings slipped by a penny to $26.53 in October. It was disappointing showing for wages, which had appeared to break out the prior month. From a year earlier, hourly pay rose a lackluster 2.4% in October. Many economists are waiting to see wages rise at a faster pace given the historically low unemployment rate.
UPWARD REVISIONS
90,000
Payroll growth was significantly stronger than previously estimated in recent months. Upward revisions showed 90,000 more jobs were added to payrolls in August and September than previously reported. September hiring was revised to a gain of 18,000 from an initial estimate of down 33,000. That keeps intact the longest stretch of consistent job creation on Labor Department record.
UNDEREMPLOYMENT
7.9%
A broad measure of unemployment and underemployment known as the U-6, which includes people stuck in part-time jobs and others, was 7.9% in October. That was the lowest monthly reading since 2006.The rate has been declining this year in concert with the narrower unemployment rate, known to government statisticians as the U-3.
The Wall Street Journal weighs in on the surprise surcharge that the Republicans presented in their tax plan — and subsequently defended when it was discovered. I have reposted it below in its entirety, because it is excellent:
You know Republicans are intellectually confused when they send out press releases defending a top marginal income-tax rate of nearly 50%. Yet that’s what they were up to this weekend as they tried to justify their bubble bracket tax rate of 45.6% after our criticism on Saturday.
We called it a stealth tax rate because it’s buried in the fine print of the Ways and Means proposal. It also isn’t part of the tax simplification story Republicans are selling by publicly claiming the House reform shrinks the individual code to four rates from seven. But caught out by our reporting, they are now denying that the fifth rate is stealthy while defending it as good policy.
The 45.6% is a bubble rate because it applies to tax-filing couples who make between $1.2 million and $1.6 million (above $1 million for single filers). The surcharge is intended to claw back any benefit these filers get from the new 12% income bracket that applies to income of less than $90,000 for couples ($45,000 for single filers).
Republicans apparently think it’s unfair for people to pay the same rate on the same dollar of income. So their surcharge applies the 39.6% rate to those first dollars of income for those more affluent taxpayers, which adds about six-percentage-points to the top rate and gets to the 45.6% bubble rate.
Add that to the 3.8% ObamaCare surcharge that Republicans are keeping as part of tax reform, and these taxpayers would now have a top marginal rate of 49.4%. Add state and local taxes, which would no longer be deductible against federal taxes (a policy we support), and these mostly Republican voters would in many states pay a marginal rate (on the next dollar of income) close to 60% and an effective rate (total share of income) higher than they do now. Keep in mind this is Republican tax policy.
It’s no surprise, then, that Republicans are resorting to Democratic arguments that this is no big deal because these taxpayers can afford it. They’re also claiming this is kosher because the 1986 Reagan reform also had a bubble rate of 33% in addition to a top rate of 28%. But a bubble rate of 33% is a lot lower than 50%, which was the top rate before Reagan’s 1986 reform.
And as we wrote at the time (“Gephardt Soap Bubble,” Sept. 25, 1989), Reagan’s bubble rate was also a mistake. It greased the skids for raising the top marginal rate to 31% from 28% as part of George H.W. Bush’s tax increase in 1990. Democrats argued then that the wealthiest shouldn’t pay a lower marginal rate than the merely affluent, and the bipartisan deal was the 31% top rate for everyone.
If the Kevin Brady-Paul Ryan 45.6% bubble bracket becomes law, this will soon become the new top rate for everybody—perhaps when Nancy Pelosi is Speaker after 2018.
The other Republican defense is that this bubble surcharge raises some $50 billion over 10 years to pay for pro-growth tax cuts elsewhere. But these rate increases never raise what they claim because people change their behavior. The political truth is that the estimated surcharge revenue is really going to finance the huge increase in the family tax credit that costs $640 billion over 10 years. This family credit will also be refundable over time, which means it will be paid as a welfare check to people who don’t pay taxes.
In other words, Republicans are embracing higher tax rates a la Democrats to redistribute the money to non-taxpayers a la Democrats. Remind us again why college-educated suburbanites who are successful in business or the professions and are unenthralled with Donald Trump should vote Republican?
The best solution would be for Ways and Means to clean up this surcharge mess when it marks up the bill this week. Failing that, we need a cleanup in aisle two, which is the Senate Finance Committee.
Politico is reporting that there is a surcharge in the new Republican tax plan for high income earners. As described,
“Thanks to a quirky proposed surcharge, Americans who earn more than $1 million in taxable income would trigger an extra 6 percent tax on the next $200,000 they earn—a complicated change that effectively creates a new, unannounced tax bracket of 45.6 percent.”
But in the new plan, House Republicans want to claw back some of that benefit for individuals who earn more than $1 million, or couples earning more than $1.2 million.
Here’s how it would work: After the first $1 million in taxable income, the government would impose a 6 percent surcharge on every dollar earned, until it made up for the tax benefits that the rich receive from the low tax rate on that first $45,000. That surcharge remains until the government has clawed back the full $12,420, which would occur at about $1.2 million in taxable income. At that point, the surcharge disappears and the top tax rate drops back to 39.6 percent. This type of tax is sometimes called a “bubble tax,” because the marginal tax rate effectively bubbles up for a brief period before falling back to a lower level.”
Besides the obvious frustration that the GOP plan did not restore the Bush tax cuts and roll back the highest bracket permanently to 35% , having yet another surcharge on the wealthy is inexcusable. The Republicans can do better, and yet they succumb to the class warfare rhetoric that the rich must “pay their fair share.” Hopefully this will be eliminated in the final bill that gets voted on.
The top individual rate for high-income earners will stay at 39.6%
The corporate rate will be cut to 20%
Tax brackets will go from seven to four: the rates will be: 12, 25, 35 and 39.6%
The standard deduction will increase for single filers to $12,000 and joint filers to $24,000 , so that those filers below those thresholds will pay no income tax.
The child tax credit will increase from $1,000 to $1,600 per qualifying child. There will also be a new family credit (considered an expansion of the child tax credit) that provides a $300 credit for each parent to help with everyday expenses.
The mortgage interest deduction remains fully intact for currently existing mortgages. In contrast, those purchasing a home in the future will only be allowed to deduct interest paid on the first $500,000 of the total cost of their mortgage.
Retirement incentives for 401(k)s and IRAs remain unchanged.
The estate tax will be fully repealed but not for six years. Between now and then, In the interim, the estate tax exemption will double.
A deduction for state and local property taxes will be capped at $10,000.
Once the House Ways and Means committee begins to gather feedback , changes will inevitably be made with a hopeful time frame of Thanksgiving for a final bill and vote.
