Asked Thursday about whether the Republican tax plan would cut taxes on the wealthy, top White House economic adviser Gary Cohn said he didn’t think Americans would care what happened to other people’s taxes — they would care about getting a tax cut for themselves.
Cohn said a “typical” American family making around $US100,000 would get a tax break of about $US1,000.
“If we allow a family to keep another $US1,000 of their income, what does that mean?” he asked. “They can renovate their kitchen, they can buy a new car, they can take a family vacation, they can increase their lifestyle.”
So. About that.
While there are still a lot of details to be filled in, the information we have available suggests the new Republican tax proposal would raise income taxes on many families who make just a bit more than the national average.
I’m going to lay out below one such typical tax situation. Meet Ann and Bob Smith.
Ann and Bob don’t have a weird, outlier financial situation. They own a home with a mortgage, they have two kids, they pay income tax in a state with moderate tax rates, they give to charity in an amount proportionate to their income. They take tax deductions accordingly. And Trump’s “massive tax cut” would actually appear to increase their tax burden by about $US600.
It’s hard enough to buy a car for $US1,000. Ann and Bob definitely won’t be able to buy one for negative $US600.
Let’s do Ann and Bob’s taxes
Ann and Bob both work, and they have $US120,000 a year of salary income.
This income is comfortable, but it’s not that far above average for a nuclear family — according to Pew, the median income in 2015 for a family where both parents work and at least one child lives at home was $US102,400. Ann and Bob are not the sort of taxpayers who are usually targeted for a tax increase — especially as part of a tax plan that cuts taxes overall.
Now, let’s flesh out their financial situation.
- Their home is worth $US420,000, or 3.5 times their income.
- They have a mortgage balance of $US252,000, 60% of their home’s value. This year, they will pay $US8,636 in interest on the mortgage.
- They pay state income taxes of $US4,800, which is 4% of their income, and property taxes of $US4,620, which is 1.1% of their home’s value.
- They give $US3,000 to charity, which is 2.5% of their income.
All of these deduction-related figures are close to the national average for a family of this type.
Using the current tax code, Ann and Bob would claim four personal exemptions (two for themselves and one for each of the kids) totaling $US16,200, and they would deduct their state income taxes, property taxes, mortgage interest, and charitable contributions, which total $US21,056.
These deductions would leave Ann and Bob with a taxable income of $US82,744, yielding tax before credits of $US12,163.
Then, they would get a child tax credit of $US1,500. This credit is normally $US1,000 per child, but because the credit is phased out for families who make more than $US110,000, Ann and Bob only get to take part of it.
All told, Ann and Bob would have a federal income tax bill under current laws of $US10,663. They’re in the 25% income tax bracket, but lower brackets and deductions and credits mean they only pay 8.9% of their income in federal income tax.
Here’s a look:
Figuring out how to apply the GOP tax framework to Ann and Bob
The tax plan announced on Wednesday isn’t legislation, it’s just a “framework.” So we don’t have enough detail to say for sure how much anyone’s tax bill would be. But there is enough detail to make pretty good guesses, as groups like the Committee for a Responsible Federal Budget (CRFB) have done.
What detail have seen does not look great for Ann and Bob.
The Republican proposal involves tax brackets (12%, 25%, and 35%) but it doesn’t say what incomes those rates will apply to. I assume, as CRFB assumes, the bracket thresholds will align with those in Trump’s tax plan from the campaign: 25% starting at $US75,000, and 35% starting at $US225,000, for married couples.
Remember the $US16,200 in personal exemptions Ann and Bob get to take on their taxes now? Those exemptions ($US4,050 for the taxpayer, his or her spouse, and each dependent) would be eliminated in the GOP framework.
That’s supposed to be offset at least in part by a higher child tax credit, but the framework doesn’t say how much higher it will be. CRFB assumed the increase would be $US500 per child, since that’s what Paul Ryan proposed to offset the elimination of dependent exemptions in his “Better Way” plan last year; I adopt this assumption.*
Finally, the framework also says the tax plan would adjust the income limits on the child tax credit. This is good news for Ann and Bob; I adopt CRFB’s assumption that Republicans will propose (as they have in the past) to raise the income limit by enough so they will get to take the entire credit, whatever it is.
So, with those assumptions made, let’s do Ann and Bob’s taxes under Trump’s plan
We’re still starting from an income of $US120,000. Trump’s plan allows deductions for mortgage interest and charitable contributions, but Ann and Bob don’t have enough of those for it to make sense for them to itemize; they take Trump’s enlarged standard deduction of $US24,000.
As I discussed, there are no personal exemptions under Trump’s plan, so Ann and Bob don’t take any of those. Their taxable income is $US96,000 — their income minus the standard deduction.
Their tax before credits is therefore $US14,250. Then, the more generous child credit rules mean Ann and Bob get a $US3,000 credit, leaving them with a net tax bill of $US11,250.
Uh oh. That’s $US587 more than they pay under current law. Ann and Bob got hit with a tax increase. Sad!
Trump’s ‘doubled standard deduction’ is a trap for Ann and Bob
A key Republican talking point for this tax plan is that it helps low- and middle-income tax filers by nearly doubling the standard deduction.
As I wrote upon the plan’s release, that’s highly misleading, because while the plan gives with one hand by raising the standard deduction, it takes with another by eliminating personal exemptions (and also the additional standard deduction for senior citizens). As a result, the benefit for taxpayers who currently take the standard deduction is small.
The change is very unfavorable for taxpayers like Ann and Bob, who currently take itemized deductions. That’s because currently you get to take personal exemptions and itemized deductions at the same time. Under Trump’s plan, you would have to pick — itemized deductions or the enlarged standard deduction, but not both.
This is why Trump’s plan greatly increases Ann and Bob’s taxable income — currently, they pay tax on less than $US83,000 of their income, but under Trump’s approach they’d be taxed on $US96,000 of income. That’s why their tax bill would go up.
There would be a similar trap for a lot of similarly situated families: people with incomes a bit above average, who currently take itemized deductions. If you’re in that situation, you should worry you’ll end up paying more.
Why raise taxes on Ann and Bob? Because that’s where the money is
Republicans could have done an across the board tax cut like George W. Bush did. But they seem to want to do really deep tax cuts for certain kinds of business owners (including people like Trump himself) — tax cuts so deep, they will need to raise taxes on someone to offset it.
The GOP has a reputation for wanting to soak the poor, but you can’t raise much money by taxing people who barely have any money.
This is where Ann and Bob come in.
But the political problem is, Ann and Bob don’t think they’re especially comfortable.
Sure, they have a home in the suburbs and good health insurance, and they live in a decent school district. But they haven’t been on a vacation in a while. They have been driving the same cars for five years. They’re going have to figure out how to pay for Cassie and Daniel’s college tuition pretty soon. They’re not sure when they will be able to retire.
Ann and Bob not going to be receptive to the idea that they ought to pay higher taxes — especially if the purpose of that tax increase is to give rich people a tax cut.
And they’re going to be pretty angry when they find out that’s what the proposal really is.
* Regarding the increase in the child credit: I wish we had more clarity about Republicans’ precise intentions here.
The amount of the child tax credit is an important matter for the finances of most families with children in the US. It says something about Republican priorities that they got the corporate tax rate nailed down before releasing their tax proposal but said they’d decide about the child credit later.
A spokesperson for the House Ways and Means Committee would not speculate on the amount of the child credit increase, saying it would be worked out between the committees in Congress that will write the tax bill. A spokesperson for the White House said the amount is up to Congress “but it will be more than enough to compensate for lost personal exemptions for dependents.”
One Republican plan that did make a clear declaration of intention about the child credit was Paul Ryan’s “A Better Way” proposal from 2016, which called for abolishing tax exemptions for dependents and raising the child credit by $US500. This is enough to offset the loss of the exemption for a taxpayer in the 12% tax bracket, but not for Ann and Bob, who would be in the 25% bracket.
The “more than enough” promise is a tall enough order that I doubt the White House has thought it through, or means it to apply to all families. You would need to raise the credit by $US1,500 to hold harmless families all the way up and down the income scale.
You’d also need to do something about the variety of situations where a parent has a dependent child who doesn’t qualify for the child credit. The framework specifies that it offers a $US500 credit in these situations, which again is enough to make whole some other families with lower incomes, but not Ann and Bob.
All of which is to say, the Smiths can’t take “more than enough” to the bank. CRFB assumes a repeat of the Ryan proposal for good reasons — if Republicans intend to promise a materially larger increase than $US500, they should announce it.
They’d also have to figure out how to pay for it. Per the CRFB analysis, the revenue losses from the Republican plan already exceed the $US1.5 trillion that is likely to be allowed under rules adopted by the Senate, meaning the tax cuts will have to be reduced rather than expanded before passage. Increasing the child credit by $US1,500 instead of $US500, for example, would add hundreds of billions of dollars to the cost of the tax package.
The dirty secret of tax reform has always been there are only two places to get the money to pay for it: wealthy or upper-middle class.
— Henry Olsen (@henryolsenEPPC) September 27, 2017
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