The Gang Tries Fixing the Tax Code

[mvd10]

Meh. There are some good things in it (15% corporate tax rate, getting rid of a lot of deductions) but it looks like it will blow up the deficit in the end. And it's a shame they won't just get rid of the mortgage interest deduction. Special interests always win.

It's funny how there is nothing about full expensing (letting businesses immediately deduct their capital investments) in the plan. Literally every Republican tax plan called for full expensing (except Trump's first plan). Full expensing also would mean getting rid of the interest deduction for businesses and that would hit real estate really hard.

[mvd10]

Doubling the standard deduction is a real slap in the face to homeowners.

why the average family now wont get taxed on their first 24,000 dollars in joint income.

It would make the mortgage interest deduction less attractive (more people opt for the standard deduction instead of itemized deductions) so less people will end up buying homes and homeowners wouldn't really benefit from expanding the standard deduction because they continue to itemize their deductions. But I wouldn't really call it a slap in the face. It's funny how raising the standard deductions mainly benefits middle-class families (Democrats should love that) but if Trump does it it is ''a real slap in the face to homeowners''.

[mvd10]

Anyway, a quick calcution based on this: https://files.taxfoundation.org/20170130145208/TF_Options_for_Reforming_Americas_Tax_Code.pdf

Cutting the corporate tax rate to 15 percent costs $2.2 trillion over a decade
Cutting income tax rates to 10, 25 and 35 percent costs $3.1 trillion over a decade
Couldn't find anything about cutting the top rate on pass-through businesses to 15 percent, but I suppose it's something like $1.5 trillion since cutting it to 25 percent costs $800 billion
Doubling the standard deduction costs $1.3 trillion over a decade
Repealing the AMT costs $400 billion over a decade
Repealing the Obamacare investment income tax costs $600 billion over a decade
Repealing the estate tax costs $200 billion over a decade

Repealing all itemized deductions except the ones for mortgage interest and charitable contributions raises $2.4 trillion over a decade
Repealing (almost) all tax credits and deductions for businesses raises $900 billion over a decade

If you add everything up you get a $6.0 trillion dollar tax cut. Now, I know it doesn't work exactly like that since repealing deductions while tax rates are low (under Trump's plan)doesn't raise as much revenue as repealing deductions with higher tax rates (current situation) and doubling the standard deduction will cost more if less people itemize their deductions (which happens when you repeal most itemized deductions) but you can make a decent estimation with the info Trump released. And the US really can't afford a $6 trillion tax cut unless it's combined with massive spending cuts (and I have a feeling Trump won't do that).

[mvd10]

Anyway, a quick calcution based on this: https://files.taxfoundation.org/20170130145208/TF_Options_for_Reforming_Americas_Tax_Code.pdf

Cutting the corporate tax rate to 15 percent costs $2.2 trillion over a decade
Cutting income tax rates to 10, 25 and 35 percent costs $3.1 trillion over a decade
Couldn't find anything about cutting the top rate on pass-through businesses to 15 percent, but I suppose it's something like $1.5 trillion since cutting it to 25 percent costs $800 billion
Doubling the standard deduction costs $1.3 trillion over a decade
Repealing the AMT costs $400 billion over a decade
Repealing the Obamacare investment income tax costs $600 billion over a decade
Repealing the estate tax costs $200 billion over a decade

Repealing all itemized deductions except the ones for mortgage interest and charitable contributions raises $2.4 trillion over a decade
Repealing (almost) all tax credits and deductions for businesses raises $900 billion over a decade

If you add everything up you get a $6.0 trillion dollar tax cut. Now, I know it doesn't work exactly like that since repealing deductions while tax rates are low (under Trump's plan)doesn't raise as much revenue as repealing deductions with higher tax rates (current situation) and doubling the standard deduction will cost more if less people itemize their deductions (which happens when you repeal most itemized deductions) but you can make a decent estimation with the info Trump released. And the US really can't afford a $6 trillion tax cut unless it's combined with massive spending cuts (and I have a feeling Trump won't do that).

There are also economic growth considerations - with a corporate tax rate of only 15%, many, many companies who moved production overseas would return production to the US. Tax cuts for the middle class could raise consumer spending and thus grow the economy overtime. Furthermore, we have to consider the amount of money that is raised from the one time overseas tax, which could end up being quite a bit.

In the end, it probably raises the deficit, and thus I likely  can't​ support it - but I will wait for the CBO estimate here.

Yeah, especially cutting the corporate income tax will increase economic growth, but not nearly enough to make the cut revenue neutral (Taxfoundation's own growth projections probably are way to rosy).

[mvd10]

Like TD said: itemized deductions massively benefit the wealthy (only a third of taxpayers actually itemize and it will be even less if the standard deduction is doubled) I'm sure raising the standard deduction and cutting the tax rates will compensate any tax hike for the middle-class.

I would accept a (big) reduction in revenues it was massive tax reform (like replacing the corporate income tax and payroll taxes with a VAT) but this is just too expensive. Creating a 15 percent tax rate for pass-throughs will be the biggest tax shelter ever. The individual reforms will add too much to the deficit while not really adding up much to economic growth. Income tax rates are fairly low now (unlike in the 80s) and cutting corporate income taxes (and maybe capital gains taxes) will work much better. I'm not sure if everyone noticed it, but this year a lot of Republican tax plans focused on cutting taxes on capital instead of slashing income taxes like Reagan and Bush did, I guess they got the memo. Cutting the corporate income tax rate to 15% will be expensive and I'd prefer if they find a way to pay for it (cutting loopholes won't cut it), but it's better than nothing. Territorial taxation is an amazing idea and they should have done it long ago.

Bottom line: I would vote for the corporate tax cut and territorial taxation, and against everything else (maybe the reduction in income tax rates if they make it revenue neutral). But in the end the debt problem needs to be solved. The US doesn't need to balance the budget at all costs, but the debt to GDP ratio should be kept sustainable, and taxes probably will have to raise to do that (combined with entitlement reforms ofcourse).

[mvd10]

That's nice.

I currently fall in the 25% bracket. I took $20,000 in deductions last year. They were fairly evenly split between mortgage interest, property tax, and charitable giving. Deleting the property tax deduction puts me roughly at the standard deduction assuming I contribute the same amount to charity. And my tax bracket won't change. So, this is a tax hike for me.

And no, interest isn't huge "just in the very beginning." Interest makes up more than half for the first, well, half of your mortgage's life.
All that to say this removes an incentive to home ownership that I can only see causing less demand and falling house prices.
Stupid. (Not you )

This is great for people who own their home outright, or have made a majority of payments on their house, but detrimental to relatively new homeowners. As you pointed out, it is also harmful to home values. In other words, it favors boomers at the expense of younger voters. 

Well not exactly. Property taxes are the same whether you're a new or old home-owner. Since mortgage interest is remaining as a deduction, that favors younger home buyers. All home buyers are fairly equally screwed by the property tax deduction removal.

Yes, I wasn't clear. Raising the standard deduction will favor homeowners who no longer pay a substantial amount of interest on their mortgage, who skew older and/or wealthier. Eliminating the deduction for state and local taxes (which includes property taxes) generally hurts the wealthier in high tax states, which skew blue.

Take, for instance, a couple of examples. A 25 year old couple who purchased a $400k house in Illinois and the same couple at 60, who also own a 400k house, which is paid off, living in Wyoming. Let's assign a household AGI of 100k to each. In the young person example, we would expect them to pay 18k in mortgage interest in year 1, based on a typical amortization schedule, plus about 10-12k in Illinois property taxes, depending on their exact location. Under the current tax law, they itemize and have up to 30k in these deductions. Under the proposed law, they would be capped at the 26k standard deduction (18k in mortgage interest deduction is insufficient to be worth it to itemize). This couple is out probably around $1,000 (4k difference in deductions times an estimated ETR of 25%) just due to this tax "cut." Now, let's take the elderly Wyoming couple. Wyoming's typical property tax rate is less than a half a percent, thus they pay only $2k in property taxes, and with the house paid off, they do not deduct mortgage interest payments. As such, we would expect them to take the standard deduction under both the current and proposed plan. This couple would pay around $4k less in taxes (12k times the same 25% ETR). From an economic standpoint, this is an inefficient use of the tax code to redistribute money, from young to old, and from high cost of living areas to low cost of living areas.

Edit: this also doesn't even address the negative impact of home values due to the effective elimination for all but the most wealthy of the interest deduction.

If there is any inefficient use of the tax code to redistribute money it is the mortgage interest deduction itself.

But you probably are right about the politics behind all of this. Trump and his team know that repealing the state and local tax deduction is a big tax increase on wealthy people that didn't vote for him and probably never will, while he can use it to cut taxes for everyone (including his voters).