We have a new federal income
tax system. The Republicans who created it say that it will transform our
economy, of course for the better.
Republicans insistently
repeat that tax structure determines economic behavior: people will alter their
behavior depending on how their money is taxed, including moving
to states with lower taxes. Let’s examine what the tax bill shows about how
Republicans think Americans should earn money.
In any tax system, there is
good income and bad income. Good income is taxed at low rates and bad income is
taxed at high rates. For example, in current US tax policy, so-called “carried
interest” is very good income. Carried interest is a kind of performance fee for
managers of private equity and hedge funds, a share of the profits, which is
typically the major source of income for such investment managers. Although
these managers earn enormous incomes, which would normally put them into the
highest tax bracket of 39.6%, special rules tax this money at only 20%, less
than the rate for normal income of the majority of Americans. That’s great
income.
Here’s an example of bad
income that affects millions of retired Americans. If your only income is
Social Security, you will probably pay no income tax on it. But if you also
have some other pension income, you could pay taxes on up to 85% of your SS
benefits.
Under the current system, a
couple who received $40,000 in Social Security and another $20,000 in other
pensions would pay under $100 in taxes. But if instead they got $40,000 in
pension income, they would pay $4500 in taxes. That works out to an effective
rate of about 23% on the added $20,000 in pension income, even though their
total income only falls into the 15% tax bracket. Their extra pension income is
bad, because it transforms non-taxable SS benefits into taxable ones.
The new tax system does not
change either the good carried interest income or the bad pension income.
Donald Trump famously said as a candidate that the carried interest benefit
allowed the very rich to “get away with murder” and promised to eliminate it if
he were elected. Of course, he has done no
such thing, and the new tax bill continues this very favorable treatment of
such income. No politician in either party has talked about changing the
penalty for pension income.
The Republican tax reform
creates new types of good and bad income. A new kind of “good income” is earned
by owners of businesses which are not corporations. Their profits are taxed as
individual income. Now they will be able to deduct 20% of what they earn from
their taxable income, effectively dropping their tax rate by 20%. There is a
limit to how much income can be sheltered this way, but complex rules put in at
the last minute will allow very
wealthy owners of real estate firms, like Trump himself, to shelter much
more income.
Other kinds of good
income in the Republican tax bill are: inheritances between $5.6 million
and $11.2 million, which used to be taxed but will be tax-free; and income used
to pay private school tuition, which is now deductible for the first time.
New kinds of bad income are: money
spent as moving expenses, which is no longer deductible; money spent as part of
your job, which is reimbursed by your employer, now to be classified as income;
many kinds of employee expenses, which are no
longer deductible, such as business travel, research expenses, tools and
supplies.
In the new tax bill there are
good and bad tax cuts. According to Republicans, corporations deserve the best
tax cut. Their tax rate falls from 35% to 21%, a provision which will add $700
billion to the deficit over 10 years, even under optimistic guesses about
economic growth. That cut is permanent. The smaller cuts for individuals are
temporary.
You can search far and wide
looking for any Republican who says that making the tax cuts for individuals
temporary is a good idea. They did this because they had to limit how much the
tax bill would add to the deficit in order to be able to pass it with their
tiny majority in the Senate. If those individual tax cuts become permanent,
that would greatly raise the impact on the deficit. If they expire as the new
law says, the advantages for individuals would disappear in a few years, while
corporations would continue to benefit.
Leading Republicans admit
that it’s “bad
policy”: White House Budget Director Mick Mulvaney calls it “gaming the
system”. Mostly Republicans just
hope that the economy will expand so much that the individual tax cuts can
be made permanent without hurting the deficit.
Why choose to make the
so-called “middle-class tax cut” temporary and the corporate tax cut permanent?
Why give most taxpayers a break by cutting rates and then take away much of
that benefit by eliminating the personal exemptions? Why add provisions which
only help the rich, such as reducing the estate tax? Why at the last minute
reduce the top rate from 39.6% to 37%?
Why make some of the income
of average people “bad” while making lots of rich people’s income “good”? That
shows us what Republican economic policy is all about.
Steve Hochstadt
Bloomington, IN
Published in the Jacksonville
Journal-Courier, December 26, 2017
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