A Wonky Look At GOP's Proposed Standard Deduction Change
Today we were all supposed to see the unveiling of the Republicans' tax plan, complete with facts and figures, drafted as a bill Congress could pass. This has not happened yet, because they can't agree among themselves over the details and are even now radically changing their own plan to assuage their own membership. We might see their tax plan tomorrow, but then again maybe we won't. There are many aspects of the GOP's tax plan that are broadly known so far, and others which are vague and ill-defined. The latter is what everyone's waiting to see, because drafting an actual bill means putting figures on paper rather than just creating political talking points -- which is so far all Republicans have done on many aspects of their plan. But they did put numbers to one radical change to the income tax law already, so their proposal to almost double the standard deduction while eliminating personal exemptions can already be subject to a deep and wonky dive into the numbers.
As with almost any fundamental change to the tax system, answering the question "Is this going to help or hurt me and my family?" is a tough one to answer. This is especially true in this case, because it is an example of one hand taking while the other is giving away (or robbing Peter to pay Paul, choose your own metaphor). There are many factors involved, and the way the numbers work almost assures that there will indeed be both winners and losers at all income levels. Without seeing the final GOP plan, it's impossible to say what will happen to Schedule A, for instance, where Republicans have been eyeing removing deductions for state and local income taxes (including, up until a few days ago, also removing property tax deductions -- but that is rumored to have now changed). The proposed removal of the Alternative Minimum Tax will also impact how many families figure their deductions and their taxes. These and other changes make it complex to figure out who exactly will be benefiting, who will be losing out, and by how much.
To keep things simple, I'm going to ignore all the other changes today, and look at the simplest tax return possible -- one where the tax filer only claims the standard deduction (instead of using Schedule A to itemize deductions). I'm also not going to take into account income level, which could very well change the final numbers for even the simplest tax returns (raising or lowering the actual amount of taxes paid, in other words). I'm just looking for the simplest way to see whether families would benefit by the proposed change to the standard deduction and the elimination of exemptions.
First, I'll lay out how things stand now versus the proposed changes. Then I'll run the numbers for four examples: a single person with no children, a single parent with one minor child living with them, a married couple with no children, and a married couple with three kids. These aren't all the possible scenarios, but they should serve to see the basic outline of the Republican plan.
The status quo versus the GOP proposal
Filers of the easiest tax form to fill out (1040EZ) aren't even aware that there is a difference between the standard deduction and the personal exemption, because both are lumped into one number they can subtract from their income before the tax amount is computed. But filers of Forms 1040 or 1040A see the number broken down into two figures. The first is the standard deduction. Using 2016 figures (the latest available), the standard deduction for single people is $6,300, and for married couples it is doubled to $12,600. Added to this figure are personal exemptions, which is figured at $4,050 for every member of the household (adults and children). So a single childless tax filer would get a $4,050 exemption, a married couple or a single parent with one child would get $8,100, and a family of five would get $20,250. Also, currently families making under a certain amount of money can claim up to $1,000 as a "child tax credit," which (unlike the standard deduction and the exemptions) is not subtracted from your income but instead subtracted from the amount of taxes you owe.
The Republican proposal is to eliminate the exemptions altogether, and roughly double the standard deduction, to $12,000 for single people and $24,000 for couples. No extra money is added to this figure for children, though. The GOP has indicated that it may raise the amount possible using the child tax credit, but they have yet to put a figure on this amount, so it is impossible to tell what the final outcome of any families' taxes will actually be.
Single with no children
A single person with no children is the simplest example possible under the tax code. They currently get $10,350 of their income tax-free, because of the standard deduction ($6,300) and one personal exemption ($4,050). Under the Republican plan, they would do even better, because they'd take the new single $12,000 standard deduction. This results in them gaining $1,650 more tax-free income for the year, which would assumably lower their overall taxes.
Single with one child
The simplest example of a household with a child in it is a single parent with one child living at home. Currently, they would get $14,400 in tax-free income for the year, from a standard deduction of $6,300 and an exemption of $8,100. Under the Republican plan, however, they would only get the $12,000 standard deduction. This means they lose $2,400 in tax-free income, which would raise their overall taxes by the additional tax for that amount.
However, such a family also currently gets a $1,000 child tax credit (unless they made a lot of money -- this credit is phased out as income rises). This means they have to pay $1,000 less on whatever total taxes they owe. The difference between a credit and a deduction is that credits lower your taxes whereas deductions lower your income (before the taxes are calculated) -- making credits much more valuable. It is unclear how the Republicans will adjust the child tax credit, although they have been indicating they may raise it. If raised enough, the additional child tax credit could make up the difference in what this family loses in their deductions. Before hearing an actual number, though, it is impossible to say this with any certainty.
Married with no children
The famous SINKs and DINKs, in other words. "Single-income, no kids" or "double-income no kids," this is the easiest example of a married couple to use. Currently a childless couple can claim $20,700 in their standard deduction ($12,600) and their exemptions ($8,100). Under the GOP proposal, this would rise to $24,000. This would mean a benefit of $3,300 more in tax-free income to the couple. Since they have no children, the child tax credit would not impact them in any way, either now or under the GOP proposal.
Married, three children
A large family with three children and married parents is the final example worth examining. Currently, the family gets a whopping $32,850 in tax-free income every year. They get the married standard deduction ($12,600) and $4,050 for every member of the household, which adds up to an additional $20,250. Large families will get hit the hardest under the GOP tax plan, because with the removal of the exemptions, they will only get the same $24,000 standard deduction that a childless couple gets. This results in paying taxes on an extra $8,850 per year.
Again, this could be remedied by adjustments to the child tax credit, but it'd have to be a pretty big adjustment. Currently, the family gets a $3,000 tax credit every year (if they don't make too much in income). This tax credit would have to rise enough to cover the income tax on that extra $8,850 of income, or the family would wind up paying higher taxes each year.
Conclusion
If this all seems needlessly complicated, well, I didn't come up with the Republican proposal so don't blame me. Normally, when Congress tweaks the tax code, they make changes which everyone can see and fully understand as beneficial -- like raising either the standard deduction or the exemption amount. If, for instance, the exemption was boosted to $6,100 per person, then for every member of the household the family would get an extra $2,000 of income tax-free. That's pretty easy to understand, in other words, no matter what size your family happens to be. But Republicans are complicating things by simultaneously taking away while appearing to generously give.
"We're going to DOUBLE the standard deduction!" is what the GOP will say to sell their tax plan to the voters. They will not mention the fact that exemptions are disappearing, because the word "double" is so much better, politically-speaking. But even this doubling isn't going to make up the difference for larger families -- instead, it will ultimately raise taxes for them. Taxpayers are going to have to understand this concept in order to adequately figure how the proposed changes will affect them.
There are many unanswered questions which need hard figures before this final calculation can even be made, though: What will happen to the tax brackets? Will the child tax credit rise, and if so by how much? How many families will never use Schedule A with the increased standard deduction, and how will that impact things like homebuying and charitable giving? Will there still be extra deductions for blind people and the elderly, or will those be removed as well as the exemptions? Will shifting some tax breaks for children from exemptions to a credit that is phased out as income climbs negatively affect average middle-class households?
All of these questions were supposed to be answered today, and perhaps they will be tomorrow. But it behooves journalists to understand this basic fundamental change in the tax system, because it falls to them (and to economics experts) to explain the proposal to the American public. Republicans are going to try to get away with loudly claiming they're doubling everyone's deductions, but they shouldn't be allowed to make such a claim without being challenged on the basic facts. In our four examples, two families benefited ($1,650 more in tax-free income for a single childless filer, and $3,300 more for a childless couple), but two families would -- absent any other changes -- see their taxes go up ($2,400 less in tax-free income for a single parent with one child, $8,850 less tax-free income for the family of five).
Republicans could have very easily created a "middle-class tax cut" by just raising either the standard deduction or the personal exemption amount. They could also have easily helped families with children out by just raising the child tax credit. They could have phased any or all of these changes out at a certain income level to avoid the tax cut going largely to the wealthiest Americans. They did not do so -- instead, they chose a needlessly complex method that is very likely to create both winners and losers. Some families' taxes will go down, and some will go up. Whenever the Republican tax plan is actually revealed, each family should be able to estimate pretty accurately which group they're going to fall into. But it certainly won't be as easy as "our standard deduction will be doubled," that's for sure.
-- Chris Weigant
Cross-posted at The Huffington Post
Follow Chris on Twitter: @ChrisWeigant
The liberal philosophy of taxation invariably distills down to "Tax the producers (corporations) and the super-rich." Or, to put it another way, "Anybody but me".
Unfortunately, that philosophy is founded on 1), normal, universal selfishness/greed, and 2), an egregious level of ignorance-cum-stupidity.
The greed part you simply have to live with, it's part of the human condition, and it ain't never goin' away. The stupidity part is almost equally as intractable as the 'selfishness', but there is some modest hope for at least an amelioration thereof, through education.
Liberals wouldn't be nearly so hot on taxing producers if they understood two eternal truths about the laws of economics. The first of those truths is that in the final analysis, corporations do not pay taxes, they simply function as collectors of taxes, pretty much equivalent to the IRS. Taxes collected at the production level are simply passed along to consumers in the form of higher prices for the things they purchase. Most liberals have no objection to that, because they're too dumb to understand it. If a tax is hidden from them, they don't even realize they're paying it.
The 2nd truth is that not ALL governments are run by idiots. Some governments are smart enough to realize that if they do not tax their producers, and we do, that their corporations will have a competitive advantage in the marketplace compared to our corporations, meaning that their workers will get the jobs, and ours will not.
And finally, liberals also do not comprehend that the burden of government cannot possibly be borne exclusively by the "super rich" simply because there are not enough of them.
There's the best I can do on the 'education' part, but experience tells me it likely wont register.
[1] The 2nd truth is that not ALL governments are run by idiots. Some governments are smart enough to realize that if they do not tax their producers, and we do, that their corporations will have a competitive advantage in the marketplace compared to our corporations, meaning that their workers will get the jobs, and ours will not.
That is trickle-down and it is a failure. We've had trickle-down for 30+ years and what's happened is very wealthy people and people running corporations have used all their extra money to ensure, in different ways, that wages remain stuck, benefits go down, and as much profit as possible accrues to fewer and fewer people. Furthermore, those people who benefit are not "producers" they are mostly parasites. Additionally, "producers" are dependent on the people they exploit -- the victims are necessary for there to be money/profit at all. Just how will "producers" make money if there aren't billions of -- to use your false analogy -- "takers"-- to buy/use/need their products and services? (Including products shoved down their throats like fees to protect their personal information from Credit Reporting Bureaus who's existence is almost entirely exploitative.)
There are arguments against taxation, but yours is a fantasy. Those of you who believe it repeat it a lot as though repetition makes it true. You're wrong.
And finally, liberals also do not comprehend that the burden of government cannot possibly be borne exclusively by the "super rich" simply because there are not enough of them.
I'm a liberal and I have never, at any time, said that "the burden of gov should be borne exclusively by the super-rich". Who's making that argument? Which liberals are saying that? That's a straw-man.
Paula
As I said, "It likely wont register". Almost nobody today understands economics, so we continue to pay the price of our collective ignorance, and likely will forever.
C. R. Stucki-
What an impressive steaming pile of bullshit you have written.
Unfortunately, that philosophy is founded on 1), normal, universal selfishness/greed,
So is capitalism.
an egregious level of ignorance-cum-stupidity.
Projecting your foibles?
Liberals wouldn't be nearly so hot on taxing producers if they understood two eternal truths about the laws of economics.
Are these really truths or just a recanting of the readers digest version of conservative economics 101?
Most liberals have no objection to that, because they're too dumb to understand it
Ad hominems do not improve your argument...
The 2nd truth is that not ALL governments are run by idiots. Some governments are smart enough to realize that if they do not tax their producers, and we do, that their corporations will have a competitive advantage in the marketplace compared to our corporations, meaning that their workers will get the jobs, and ours will not.
And yet, any list of the worlds most profitable corporations will be dominated by American corporations. How do you explain that?
And finally, liberals also do not comprehend that the burden of government cannot possibly be borne exclusively by the "super rich" simply because there are not enough of them.
I have paid a net yearly income tax for every year I have worked, some years that total income was quite low and have never seen any mainstream liberal politician propose that I should not pay any tax. I think you need to back this claim up.
The super rich should pay their fair share including income both earned and unearned, the latter part being a real problem...
There's the best I can do on the 'education' part, but experience tells me it likely wont register.
That you wrote education in quotation marks is definitely appropriate...
And finally, liberals also do not comprehend that the burden of government cannot possibly be borne exclusively by the "super rich" simply because there are not enough of them.
Yeah, especially since we've provided them so many ways to get out of paying their share in the first place - lower capital gains rates, generous deductions, etc., etc. Trouble is, Republicans (C.R. included, I guess) fail to understand the true dimensions of, or ramifications of, the immense concentration of this country's wealth at the very top. Even conservatives estimate that those in the top 1% control better than 70% of all American assets.
And yet, the new tax rate tops at 39.6% for single filers making $500K, and married making $1M, but those making one hundred times that much (multi-millionaires), and one thousand times that much (billionaires) will also pay that same historically low rate.
And that's all, of course, before their tax accountants get their crack at it.
Say what you will, Robert Mercer won't have to pony up anywhere near the percentage of his income and assets this year as my 85 year-old widowed mother will have to - nor will his home and life be on the line if he doesn't, as hers will.
How is she in such jeopardy? State taxes, which under the new GOP plan, would no longer be deductible, combined with a (taxed) generous military widow's benefit. School taxes alone account for two thirds of her local tax burden, and that cost is likely to rise, not fall, in the coming years.
Balthasar
When liberals decry the "Immense concentration of wealth at the top", their implication is always that all that wealth was stolen from the poor people.
The Walton family (just as one example) is rich because they do such a good job of distributing products to consumers at the best possible prices that 60 million of us traipse through their stores every single day, showering our money upon them.
And don't bother responding that they are rich because they underpay their employees. I personally know many people who work or have worked at Walmart, and not a single one of them was ever there against his will.
Any employee who thinks he is underpaid has the obligation to either offer his time and talents to other employers, or alternatively to go into business himself. If he is not successful in earning more by that means, it pretty much indicates that he most likely was NOT underpaid, right?
That's just how the real world works, regardless of how much you all hate it to be so.
Don H.
Your third paragraph raises serious concerns about the validity of the opening sentence of your first paragraph.
Perhaps I'm in error for assuming that everybody understands that at the level of the national debate over 'tax reform' (the subject of Chris's piece), that we're only discussing income tax.
Nobody, least of all this writer, would suggest that corporations/producers be exempted from paying local taxes, nor does anybody advocate that they be allowed to steal the property of others ("materials, equipment, buildings and energy", as you put it.) Give me a break!
What I'm saying is that producers (corporations) should be exempted from paying corporate income tax. Corporate income should all be taxed at the individual level, same as wages and capital gains, after being distributed to the shareholders, the way the portion of it distributed currently as dividends is taxed
FAR more reasonable and far more efficient system than the way we do it now, without the potential of handicapping domestic corporations vis-a-vis foreign corporations.
When liberals decry the "Immense concentration of wealth at the top", their implication is always that all that wealth was stolen from the poor people.
Always? I would love to see you back that up...
The Walton family (just as one example) is rich because they do such a good job of distributing products to consumers at the best possible prices that 60 million of us traipse through their stores every single day, showering our money upon them.
The Walton family is rich because Sam Walton left them a huge fortune. I think most of any increases of wealth comes from capital gains and not day to day running of Walmart. You conveniently leave out Walmart's role in both the devastation of the merchants of Small Town USA as well as being one of the early innovators of moving manufacturing jobs to Asia.
And don't bother responding that they are rich because they underpay their employees. I personally know many people who work or have worked at Walmart, and not a single one of them was ever there against his will.
Don't bother because you can't handle the reply? Yes, no one at Walmart holds a gun to someone's head forcing them to work. On the other hand, if they are the only major employer in the area there is very little difference...
That's just how the real world works, regardless of how much you all hate it to be so.
So far what I have seen from you is a grossly over simplified version of how the world works sprinkled with idiotic partisan insults...
The problem with your corporate income tax is really just tax collection is corporations generally charge what the market can bear modified by what the competition is able to charge. Sure they would love to pass along any taxes, and some times they do. Other times the market has different ideas depending on what other competitors in that space are doing and the corporation has to just take the hit to their bottom line.
The interesting thing that no one has really focused on is the impact to local economies the removal of the state and local tax deduction will have.
So at the end of the day this will result in a tax increase for the working joe which will and will encourage corporate flight to states that have lower tax bases or better incentives.... No matter how you slice it certain states will suffer while others will continue to be reliant on handouts from the federal government.
Which interestingly enough tend to be red states....
BashiB
Of course the Walton kids are rich "Because the Dad left them a huge fortune". But how did Sam create that fortune? As some wise man (OH, that was me!!) recently wrote, "By doing such a good job of distributing goods to customers at the best possible price that each and every day, 60 million people traipse thru his stores showering their money on him", right? And if you think the retail stores are not still immensely profitable, check the stock price.
Yeah, Walmart put a lot of Mom'n'Pop operations out of business. And how did he do it? By offering consumers more and better deals, thereby raising the living standards of every American consumer.
Henry Ford was a thousand times worse than Sam. He put MILLIONS of harness makers, buggy whip makers, wagon makers and farriers out of business. Do your really think we'd be better off if Sam and Henry hadn't done what they did??
Sorry, you're WAY over your head in this discussion. I probably wont bother you again. (Oops, I suppose there's another "idiotic partisan insult", right?)
Don H
We're not communicating. I don't want "businesses to be able to use gov't services without paying income taxes."
My tax plan would be to require 100% of corporate income to be assigned to some individual person (normally a shareholder - think 100% of corporate profit as dividends basically), who would then pay taxes on that income at whatever bracket rate he happens to be in.
Then fine, go ahead and tax corporate income at whatever rate makes you happy, because since every corporation's profit would be zero, their corporate income tax would also be zero. But surely you can understand that this would be a far more equitable, and more economically sound, system than what we now have. Every cent of net income/profit would be taxed at whatever rate society has decided is the most fair.
Re "Think of how much less businesses would have to pay their employees if the employees didn't have to pay taxes." Wow, just WOW, that is a scary statement! No man's wage/salary income has ANY connection whatsoever to how much tax he has to pay! A person's income (in a competitive labor market) is the market value in dollars of whatever his contribution is to the creation of the goods or services the venture produces. Doesn't matter in the slightest how much his tax bill is, how many dependents he's got, how much his grocery bill or whatever is.
But how did Sam create that fortune?
By undercutting American labor by outsourcing to Asia. By using the economy of scale to push out the little guy. All sprinkled with with dam good business sense.
By offering consumers more and better deals, thereby raising the living standards of every American consumer.
Look at small towns dominated by Walmart today and compare them to how the towns were before Walmart came in. In many cases that is just not true.
Henry Ford was a thousand times worse than Sam. He put MILLIONS of harness makers, buggy whip makers, wagon makers and farriers out of business. Do your really think we'd be better off if Sam and Henry hadn't done what they did??
Henry Ford invented the modern assembly line. So no we would not be better off without Ford or someone like him. Sam Walton? Not so much. But to worship these two and hold up only the good with looking at the bad for a complete picture seems like you don't really know what you are talking about.
Sorry, you're WAY over your head in this discussion. I probably wont bother you again. (Oops, I suppose there's another "idiotic partisan insult", right?)
Yawn...
OMG... This is nonstop funny.
DECREED: It is heretofore required on this page that everyone must incorporate the words "60 million of us traipse through their stores every single day, showering our money upon them" into every single comment.
:)
Bashib
One more try, against my better judgement.
When Sam Walton (or anybody for that matter) "Undercuts American labor by outsourcing to Asia ", it normally results in the loss of a tiny percentage of American jobs, like maybe .002%. That results in a few hundred Americans becoming unemployed, for which the system provides at least some rescue in the form of unemployment insurance.
The benefits however, in the form of lower prices for high quality goods, accrue to ALL 225 MILLION AMERICANS each of whom can now buy a new shirt or pair of shoes for $25 that formerly cost $50 when made by those now unemployed Americans. Bottom line, the benefits of free trade (aka outsourcing) VASTLY outweigh the negatives!
Then when Sam uses those "benefits of scale" to "push out the little guy" (presumably the Mom'n'Pops) same thing!! A couple thousand people have to retire or find another way to make a living, and ALL 225 MILLION of the rest of us get our groceries and dry goods 50% cheaper than before!
So, the liberals all hate Sam Walton, but the vast majority of them all shop at Walmart, right?? Amazing, who could possibly figure that out?
One more try, against my better judgement.
Right back at you. It's your pompous bullshit attitude that because I'm a liberal I am some how an idiot that can't understand economics and because you are conservative that somehow that makes you an expert that I am rallying against. I went college, I studied this shit and what I don't know I can come up to speed relatively quickly. One of those neat skills they teach you in higher education. And I am far from the only one on this board with those qualifications or better. On the other hand I have tossed basic questions at you and so far have gotten mostly crickets in response. I have to assume that is because you don't understand the subject well enough to incorporate additional factors in to your simplified spiel. So, unless you can tell me where you got an advanced degree in economics and point me to your published papers, cut the pompous act and back your arguments up instead of just pontificating rudimentary republican economic theory, and insulting our collective intelligence in the process. If you honestly want to talk tax policy or general economics, I and others around here are happy to oblige, but drop the BS attitude, it just makes you look like a fool.
Aside from the fact that you are pretty obviously pulling numbers out of your ass, my point was Walmart was one of the first large companies to outsource manufacturing to Asia. Though their overall numbers are low, the entire movement to Asian manufacturing is high in total jobs lost/Asian manufacturing output. Some of this is positive and some is negative. Why do you insist on ignoring the latter?
The benefits however, in the form of lower prices for high quality goods, accrue to ALL 225 MILLION AMERICANS each of whom can now buy a new shirt or pair of shoes for $25 that formerly cost $50 when made by those now unemployed Americans. Bottom line, the benefits of free trade (aka outsourcing) VASTLY outweigh the negatives!
Have you compared the price of a new pair of Nikes to the price of a new pair of New Balance sneaks lately? Not to mention Walmart is known for pushing so hard for low prices that many companies produce special lower quality items that look just like their higher quality counterparts specifically for Walmart.
Then when Sam uses those "benefits of scale" to "push out the little guy" (presumably the Mom'n'Pops) same thing!! A couple thousand people have to retire or find another way to make a living, and ALL 225 MILLION of the rest of us get our groceries and dry goods 50% cheaper than before!
All 225 million and 50% cheaper eh? Lets see you back that one up, heh. What cross section of the over 300 million Americans are you talking about? And please do point out where Walmart is charging 50% cheaper than other stores for groceries? Sounds like numbers are not the only thing you are pulling from where the sun don't shine...
So, the liberals all hate Sam Walton, but the vast majority of them all shop at Walmart, right?? Amazing, who could possibly figure that out?
All liberals? Really? Can you back up this overly wide brush you are painting with?
Pleased to hear you "Went college and studied this shit," that answers a lot of questions.
Why are you bringing up "groceries"? When debating the benefits/merits of free trade (outsourcing), there isn't much use in discussing groceries, as only a tiny percentage of the food consumed in the USofA comes from Asia. That's why I mentioned 'shirts and shoes' in my theoretical example and not meat, eggs or veggies, right?
You're right, I cannot provide statistical proof that 'ALL liberals hate Sam Walton'. I Googled it, and it turns out only 99.999 percent. So, is the .0001 just you, or is there one other? .
Pleased to hear you "Went college and studied this shit," that answers a lot of questions.
Does it really? Please expand on that...
Why are you bringing up "groceries"?
because you wrote: and ALL 225 MILLION of the rest of us get our groceries and dry goods 50% cheaper than before!. Are you not paying attention to what you write?
You're right, I cannot provide statistical proof that 'ALL liberals hate Sam Walton'. I Googled it, and it turns out only 99.999 percent. So, is the .0001 just you, or is there one other? .
When talking out your ass, does it make a fart sound?
You're right, Sorry for mentioning groceries in a previous post. Most Walmart shoppers feel they save money on groceries, but nothing like what they save on imported goods.