PARSING CONGRESS’s BIG TAX REFORM

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^ Senate Leader Mitch McConnell (l) and Orrin Hatch (r) : the Senate’s tax reform misses the entire point and cannot be supported

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So : can we support the bill, or not ? Do we endorse all of it or only some of it ? Or can we like any of it ? These questions I will try to answer in this, my first report on a proposal already generating a wave of criticism, as expected.

There are two separate tax reform bills on offer. First is the House’s version, which was adopted by a 227 to 205 vote (13 Republicans joined all 192 Democrats voting No). You can read the details of the House bill here : http://blog.acton.org/archives/98766-explainer-what-you-should-know-about-the-gop-tax-plan.html?gclid=EAIaIQobChMImcfAgMjX1wIVhrbACh26EgZ9EAAYASAAEgI9G_D_BwE

Please note that the final House bill reinstated the adoption tax credit not listed in the above, original version of the House proposal.

It’s not easy, at surface perusal, to fault the bill that the House finally adopted. The mortgage interest deduction is retained, as are deductions for state and local taxes and adoption. The one missing item that matters a lot is the deduction for interest on student debt, and I agree that this deduction should be retained and even expanded.

Beneath the surface, however, the House’s tax reform includes a number of changes that would significantly change the way households compute their taxable adjusted income. Here’s the major changes — a long list, but the tax coed is not short. Study these items carefully :

The highest tax bracket would remain at 39.6%: According to reports, the plan would propose a fourth marginal tax bracket on high-income earners. It will reportedly apply to married couples making more than $1 million a year.

  • New individual tax brackets:
    • 12%: Applies to incomes up to $45,000 for an individual and $90,000 for a married couple.
    • 25%: Applies to incomes up to $200,000 for and individual and $260,000 for couples.
    • 35%: Applies to incomes up to $500,000 for an individual and $1 million for couples.
    • For single parents that are heads of households, the thresholds would be the midpoint between individuals and joint filers, expect for the highest bracket which would still kick in at $500,000.

 

  • A change to the state and local tax deduction. One of the biggest hangups for Republicans in states like New York, New Jersey, and California has been the proposed elimination of the state and local tax (SALT) deduction. The benefit allows people to deduct those taxes from their federal bill. Brady said Tuesday the GOP reached a deal that would allow people to deduct state and local property taxes up to $10,000 but not income or sales taxes.

Corporate tax cut will be immediate and permanent. The cut to 20% from the current 35% will is designed to be permanent.

  • Immediate expensing of business investments: Companies can deduct the cost of business investments from their tax bill in the year that they make them instead of spreading it out over multiple years.
  • Elimination of the estate tax. The threshold for the tax, which applies only to estates with greater than $5.6 million in assets during 2018, would double to over $10 million. Then, the plan would phase out the tax after six years. The Senate GOP appears to be mulling preserving at least part of the tax.
  • Repatriation tax rate. The repatriation rate will be a mandatory one time tax on overseas assets for US companies. Illiquid assets would be taxed at a 5% rate, spread out over a longer period than liquid assets like cash which would be taxed at a 12% rate.
  • No repeal of Obamacare’s individual mandate. Despite Trump’s last-minute push to eliminate the penalty for not having insurance, such a provision was not included in the plan.
  • No changes to 401(k) plans. Despite a back-and-forth between House tax writers and the White House that appeared to suggest some change to retirement-savings accounts would be included in the tax bill, there were no changes proposed in the first iteration.

 

Increase in the size of the child tax credit. A pet project of Ivanka Trump, the proposal is to increase the credit to $1,600 from $1,000. The bill would also add a credit of $300 for each non-child dependent or parent for five years, after which that provision would expire.

  • Limiting home-mortgage-interest deduction. On new-home purchases, interest on loans up to $500,000 would be deductible. The current limit is $1 million.
  • A larger standard deduction. To avoid raising taxes on those currently in the 10% tax bracket, the standard deduction for all taxes would increase to $12,000 for individuals (up from $6,350) and $24,000 for married couples (up from $12,700). These are slightly less than the doubled deductions expected — and, as Business Insider’s Josh Barro has written, the idea that this would save people money may be misleading since it eliminates other personal deductions and a secondary standard deduction.
  • A 25% rate for pass-through businesses. Instead of getting taxed at an individual rate for business profits, people who own their own business would pay at the so-called pass-through rate. There will be some guardrails on what kinds of businesses can claim this rate, to avoid individuals abusing the lower tax.
  • Elimination of most personal itemized deductions and many credits. The only deduction preserved explicitly in the plan is for charitable gifts and edited home-mortgage interest. Some of these include:
    • Elimination of the student-loan-interest deduction: The amount paid toward student loan interest can currently be deducted.

 

Elimination of the medical-expense deduction: Under current law, individuals who spend over 10% of their income on medical expenses are allowed to deduct part of those costs from their taxes. The proposed new bill would remove that deduction.

  • Elimination of the moving deduction: This allows anyone who moved to a new home in the past year to deduct moving expenses.
  • Elimination of alimony-payment deduction.
  • Repeal of the alternative minimum tax (AMT). The tax, which forces people who qualify because of an outsized number of deductions, would be eliminated under the legislation. Incidentally, Trump’s own tax bill has been shown to be millions of dollars more because of the tax.
  • Create a tax on large private university endowments. Private universities with assets of more than $100,000 per student will pay a 1.4% excise tax on their net investment income.
  • Repeal the Johnson Amendment. The current rule prevents tax-exempt nonprofits from making explicit election endorsements.
  • Eliminate the ability to deduct interest on bonds for sports stadiums from federal taxes. Currently, local governments issue bonds to pay for the construction of sports facilities, this would prevent people from deducting interest income form those bonds on their federal taxes.

 

The Johnson Amendment repeal is particularly distressing. Adopted in 1954, this legislation bar religious organizations from participating directly in political activity — a barrier well conforming to the precepts of the Constitution’s First Amendment. Right-wing religion interests already impact our public policy, greatly impeding the Constitutional right of women to control their own bodies and, in many cases, denying full civil rights to LGBT people. The last thing our policy makers should be doing is giving even greater political clout to anti-civil rights interests.

As you can see, elimination of several other current deductions will impact middle-class taxpayers quite negatively, and the increased standard deduction doesn’t come close to compensating. Other deductions and credits impact particular classes of taxpayer : ( 1 ) the deduction for school supplies bought by teachers is eliminated (2 ) the $ 600 increase in the child credit seems stingy. If we want to help working FAMILES, why not raise it by at least $ 1,400 ?

Unfortunately, on many counts, the Senate bill is even more unacceptable, especially as amended by committee Chairman Orrin  Hatch :

  • The amended bill would slightly cut individual tax rates for multiple brackets and set seven rates: 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent and 38.5 percent. Those changes, as well as the near doubling of the standard deduction, would expire after 2025. The reduced corporate tax rate, down to 20 percent from 35 percent, would be permanent.
  • The child tax credit would rise from $1,000 to $2,000. It would start to phase out at $500,000 in household income. The change would also sunset after 2025.
  • As expected, the plan would effectively repeal the Obamacare individual mandate, which requires most Americans to have health insurance or pay a penalty. Senators say doing so will save more than $300 billion to give Republicans more budget flexibility. The Congressional Budget Office has estimated that it will lead to 13 million more people uninsured by 2027 and increase average Obamacare premiums.
  • The Senate plan would expand proposed tax breaks for pass-through businesses. Those would also expire after 2025.
  • It also gets rid of a provision that would have taxed company stock options when they vest. Silicon Valley had opposed that measure, saying it would suffocate entrepreneurial effort

The Senate’s plan is what it is because the House legislation increases the national debt, which means that the Senate would need 60 “yes” votes to approve it, and 60 voters it cannot get. Senator Hatch’s proposal is said to be “revenue neutral.”

I cannot endorse his proposal, however. Making corporate tax cuts permanent while phasing out individuals’ deductions is bad policy, unfair and exactly wrong. If any tax changes should phase out, it’s the corporate cuts. I also decry Hatch’s lack of a deduction for student debt interest. The entire student debt riddle needs major reform. Student debt hangs over every gradure’s head at dollar levels that only the job-fortunate graduates can ever dispose of.  Student debt is also exempted from bankruptcy relief — an unfairness with zero justification that I can think of. A debtor in bankruptcy can discharge IRS bets, but not student debt ? Give me a break. What does student debt support ? Inflated salaries for university administrators, including those at for-profit colleges — there shouldn’t even BE for-profit education, much less undischargeable debt to support such profits.

Hatch’s proposal also eliminates the “individual mandate ” that is the cornerstone of Obamacare, thus seeking the very undermine that Congress correctly refused ti app0rove in at least two separate votes earlier this year. Given the elimination of the ACA’s basis as well as the refusal to adjust student debt, hatch’s proposal can NOT be supported. It must fail.

Which brings tax reform back to the House version. It needs some Democratic support if it is to get by the Senate’s 60 vote rule. I think that if a deduction for student debt interest is added to the House version, and assuming that its individual deduction reforms are not phased out, it might gain some Democratic support. That it increases the national debt, at a time when interest rates remain historically very low  — barely above one percent — seems to me a nonce. Why not borrow money if the cost of it is practically nothing ?

Let’s see if our Congress can get past its donors’ self seeking demands and onto a policy that benefits almost everybody.

— Mike Freedberg / Here and Sphere

Author: hereandsphere

Here and Sphere is an online journal of news, opinion, reviews, advice, & bits n' pieces of everything else - from HERE to SPHERE...... Co-founded by Michael Freedberg, a long-time Boston Phoenix journalist, and Heather Cornell, a South Coast Massachusetts columnist and editor.

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