Tax reform is finally on the table and major details of the plan have been revealed. The media has already begun to demonize the plan as one which exclusively benefits the rich and raises the liability of the poor. As usual Republicans and the Trump team refuse to defend the plan in public so most of the burden again falls on independent bloggers like me. I will go through most of the items included in the package and show why they are necessary. Once the actual tax brackets are revealed I will come up with an actual computation like I did in a previous article.
Standardized Deductions and Personal Income Tax
Raising the standard deduction and collapsing the tax bracket is one of the two core ideas in the proposal. The standardized deduction will be doubled for both married and single filers and the tax brackets will be collapsed to 12 25 and 35 percent respectively. The media has seized on this to show how Trump is raising taxes on the poor as the lowest tax rate will be rising from 10 to 12 %.
This is a lie. There is really no other way to say it. If you are currently in the brackets which pay 10% (up to 9325$) and the standardized deduction doubles then the most likely result is that you will pay no taxes. Even if you do end up paying 12% on some of your income the taxable amount will be much smaller due to the increased standardized deduction.
Since the standardized deduction has been increased other tax deductions are being removed. Fake news then uses this fact as a jumping off point to prove that the Trump tax reform plan is harmful to those with lower income. What no one in the news is saying is that the vast majority of people do not use these deductions. According to official IRS data in 2013 63% of filers opted to use standardized deductions. Data available from non-IRS sources say that in 2016 70% of filers opted for standardized deductions. If you are one of the 63-70% of the population who uses standardized deductions then removing these deductions will not affect you as you were never using them in the first place. In addition to this when you double the standard deduction you also push people into it so the deductions that are getting removed will not affect them.
One deduction I would like to focus on is the state and local tax deduction. The media has said that this unfairly targets Democrats. In a sense this is true. 1/3 of all the deductions from SALT come from New York, California, and New Jersey. Make no mistake, these are not the poor people in these states. They would already be taking the standardized deductions so would not be using the SALT. The people who claim these deductions are among the wealthiest in the area. If you will recall these are the very same people who say they want to pay more in taxes so others can get a tax break. They are now being given the opportunity to do this. If they actually do not want to pay higher taxes than they should petition their congressmen.
The Trump proposal for tax reform lowers the corporate tax to 20% from its current 35% and removes some of the deductions that the companies can claim. This is of course being hailed by the media as a major tax cut for the rich at the expense of everyone else. Before we go further into this let me just point out that the Democrat recipe for tax reform is to keep it at its current 35% and remove the deductions. This is lunacy. In our current system we are already experiencing inversions as some of our companies are moving their headquarters to Ireland and other tax havens. For those who are wondering these are not companies like Walmart or Koch Inc which the left love to hate. The companies doing these inversions are those that the left loves like Apple, Google, or Microsoft. The very same companies that make California so rich.
America currently has a two tier tax system. There are companies who can afford to hire lawyers to take advantage of all the loopholes and deductions the law offers and they pay a real rate of 15-17%. Then there are smaller companies who cannot afford to do this which pay close to the statutory rate of 35%. In other words our current tax code helps companies like Walmart drive smaller ones out of the market. They already have enough other advantages they do not need the tax code too.
The Trump tax reform proposal levels the playing field between the two tiers. Since most deductions are going away both tiers will be paying near the 20% mark. This means that those companies who paid 16% before would have their rate increase while those who pay 35% would see a decrease. Of course the increase for those who pay a lower rate is offset by the lower need for tax lawyers and accountants.
After praising Obama who doubled the deficit of all past presidents combined Democrats and their allies in the media find that they suddenly care a lot about the deficit. The accusation is that the Trump tax reform will blow this up.
This is again not true. Take personal income tax reform first. When you get a tax refund you do not hide it in your mattress. This is particularly true of those who have low incomes to begin with it. You would spend the money in your local economy for food or whatever else you want to buy. At that point the government already gets a cut of this in the form of sales taxes. The business owner who makes more money may end up hiring more people or the professional who provided the service would have more disposable income. They spend and the government gets a cut of that too. The very people arguing that a minimum wage increase would be good for the economy should be the first one arguing this point.
On the corporate side the companies that are taking so many deductions that they pay less than 20% would actually end up paying more (although again they would offset this by paying the lawyers less).
This tax reform is great for almost everyone involved. Not only does it lower the tax burden for most people it also simplifies the process. Since everyone is pushed into taking standardized deductions the time required to determine your taxes drops tremendously.
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