When Tax Reform Hurts

GOP Tax Reform Helps the Wealthy

Not the Rest of US

The tax reform bill that squeaked through the House of Representatives this week drastically cuts taxes for the very wealthy and will add $1.5 Trillion to the federal debt over the next decade.  Those of us who work for a living did not fare so well.

People who use deductions and credits for housing state and local taxes, medical expenses and education costs will probably end up paying more in federal income taxes under the current plan.

Using old and unproven arguments, the GOP leadership cut the corporate tax rate on profits from 35% to 20%. Claims that this will lead to more jobs and higher wages do not hold water. What the corporate tax rate cut is much more likely to generate are increased dividends to stockholders and increased executive pay. Interestingly, about $70 billion a year, 35% of the benefits will flow directly to foreign investors who own shares in American companies, according to the Urban-Brookings Tax Policy Center.

Real estate partnerships, hedge funds and other business that pass profits through directly to owners untaxed will see significant benefits under the new bill. The GOP leadership wants those owners to pay just 25% on those profits instead of the ordinary income tax rates that go up to 39.6%. The Trump family is a prime example of the type of business owner invested in real estate that will see enormous tax cuts with this new benefit.

The secret backroom negotiations that led to the new code revisions hit middle-class families, especially those in high tax states, the hardest with the elimination of deductions for state and local income taxes, limiting the real estate property tax deduction to $10,000, capping the mortgage interest deduction at $500,000, elimination of deductions for medical expenses, college tuition and interest on student loans.

There are still more Trump family benefitting changes as well. The bill eliminates the alternative minimum tax now paid by wealthy people with lots of deductions. Trump’s leaked tax returns for 2005 show the vast majority of the taxes he paid in that year were based upon the alternative minimum tax. Of course, he has not revealed any of his other income tax returns so we can only speculate on the impact the new code provisions will have on his current business income stream based upon know investments. The other major benefit to Trump and his children is found in changes to the federal estate tax. That tax currently applies to inherited wealth over $5.5 million. The new bills exempt inherited wealth up to $11 million next year and phases out the tax completely by 2024. That single change will benefit just 0.2 percent of the people who die every year, but will cost the government $269 billion over a decade.

House Speaker Paul Ryan (R-WI) claims that a middle-class family of four earning $59,000 per year will see tax savings of $1,182 per year under the new plan. Tax experts at New Your University Law School sees the claim as illusory because the cut will evaporate over a decade as several tax credits in the plan expire and inflation indexing changes take place. It is estimated that Ryan’s hypothetical family will see a tax increase by 2024. If the bill simply cut income or payroll taxes for middle class workers and doubled the standard deduction for individuals and married couples, it would be easy for the GOP to make their case for middle class tax relief. They rejected that simple approach.

Another current middle class tax benefit will vanish. Now, parents can claim personal exemptions for themselves, their spouses and dependent children. The new bill eliminates these exemptions in favor of a $300 personal credit for each parent. Even that expires in five years. For larger families, this clearly increases their federal income taxes.

The elimination of the medical expense deduction hits those with chronic illnesses and lousy medical insurance incredibly hard. If you have or make lots of money and can pay out-of pocket medical costs, you win. If you cannot, more of your paycheck vanishes to pay the doctor.

New polling on public reaction to the new plan shows that it is in trouble. A survey by Global Strategy Group in key states show that sixty percent believe the plan favors the wealthy over the middle class. Twenty percent believed they would personally see a benefit. Those responding to the survey voted for Trump by a 13-point margin.

Republicans in key states with high state and local taxes are on the fence as are those aligned with the construction industry that views mortgage interest rate deductions and property tax credits as keys to home ownership. If more Americans see the bill as a gift to those who do not need it and little to no benefit to those that do, it should fail.

Waring R. Fincke is a retired attorney and serves as a guardian for the elderly and disabled.