So it is almost bizarre to think that there will be any Democrat defections to support the tax reform plan as long as it maintains that provision. And if the Republicans really wanted to allow themselves the latitude to pass tax reform without Democrats, is the administration and the Congressional leadership really going to stick with the removal of state and local tax deduction from federal tax bills considering the damage it will likely do to Republicans’ election prospects? Or was it just a ‘straw man’?
And yet, if they do decide to still allow that deduction as part of a ‘compromise’, then what about the additional money that will still need to be raised elsewhere in the tax plan to leave it ‘revenue neutral’? This smacks of the same sort of hubris that is one of the end results of the failure of the health insurance reform effort: the trillion dollars of expenditure that remains in the still in force Obamacare plan.
That is, therefore, money not available to use in the tax-cutting effort. While Republicans and the Trump administration have made much of the degree to which tax reform was going to be easier than healthcare insurance reform, we and many others have noted it will not be because of funds freed up from the Obamacare plans after that reform effort has failed. That is why the Obamacare repeal and reform was tackled first, and its failure has a negative impact on the tax reform effort.
Other pros and cons
There are some real positive aspects outside of the likely backlash to the proposed elimination of the deductions noted above. And in fact, there was a very good summary of this from Business Insider’s Bob Bryan in his Wednesday article IT’S HERE: All the details of Trump’s massive tax plan. Especially the concise breakdown of the key business and personal taxation changes on page two into the top of page three are very interesting and useful.
He notes that Trump has already given some ground for the sake of fiscal sanity and moved from his 15% corporate tax rate target to 20%. Yet National Economic Council Director Gary Cohn and other were clear earlier today that this was a bright-line limit on the acceptable high end of corporate taxation. We shall see. And while they promised streamlining through the elimination of some business tax deductions and incentives, there was almost no detail on this. And that is now an area of further contention within the Trump administration’s ‘simple’ plan.
However, there were obvious net positives on both the corporate and personal sides. The proposed one-time repatriation tax rate for company profits currently held overseas is a sheer net positive. At least in the first year, this will yield substantial additional tax revenues regardless of whether companies use the remaining funds for stock buybacks, dividend distributions or actually invest in expansion and training.
The personal tax rate changes are also clearly a net benefit to individuals, especially lower- and middle-income taxpayers. While the lowest tax rate goes up from 10% to 12%, the relative doubling of the ‘standard deduction’ means that people do not begin paying taxes until they retain more money. As a rough example, a lower income couple earning $30,000.00 per year would get roughly a $1,000.00 tax reduction.
That seems to be a recurring theme even when moving up into the middle-class income tax brackets. It is also enhanced for families with children by an expanded child tax credit of $1,000.00 that will not phase out until higher incomes levels than previous. There are also three simplified tax brackets, down from seven previous.
While the ‘middle class’ tax bracket has not been specified as yet, it will be taxed at 25%. That will represent at least a modest tax reduction for folks earning roughly $100,000 or more up until the $400,000 area; at least based on the current tax brackets likely to be subsumed into the new brackets.
Contentious political issue
Yet all of that will be different state by state, with the folks in states with the highest state income taxes possibly not seeing any overall tax reduction, or even being taxed more, if the state and local income tax deduction discussed above are indeed eliminated. That brings us U.S.back to just what a contentious fiscal and by extension political issue that will be through the process of these negotiations.