Monday, December 4, 2017

Update 3: Final Senate Tax Plan Eliminates Most of My Tax Increase, But at What Cost?

I have been chronicling how the various iterations of Republican tax "cuts" would increase my family's tax bill in order to illustrate its effect on an upper middle class, homeowner family in California.  Summarizing the results to date:

Original Trump "Framework": Over $4,000 tax increase
House Tax Plan: About a $3,000 increase
Senate Tax Plan (original  proposal): $2,100 increase next year, $3,250 increase in future years
Final Senate Tax Plan:  Little to No Change in my taxes.

The final tax plan included three changes to lower my taxes that mostly offset the tax increases that came from eliminating $30,000 worth of exemptions for dependents and deductions for state/local taxes.  These three changes to the final bill had a combined effect of cutting our estimated tax bill by about $3,000, eliminating the tax increase in the draft Senate Plan:

  • Marginal tax rates were further lowered (down to 24% in last version).
  • Child tax credit increased to $2,000, and $500 for non-child dependants.
  • Changes to pass through business deduction looks like it would now apply to a small portion of my wife and I's income that is reported on Schedule C, not W-2 wages. 
Of course, these changes had to be "paid for" by a number of provisions that increase the indirect effects on us such as:
  • Repealing individual mandate under Obamacare could destabilize health insurance markets and raise rates.  "Fixing it" outside of the tax bill as some Republicans have promised will cost significant money, further increasing the federal debt even if it stabilizes insurance.
  • Making individual taxes expire in less than 10 years.  Republicans promise that future congress won't allow these to expire.  Of course, that future "fix" will also further increase the federal debt.
  • Keeping the AMT (alternative minimum tax) at higher income thresholds.
Who knows what will come out of the Senate/House conference, but it will probably look more like the Senate plan since the vote margins are much smaller there.  If the final bill looks like the recently passed Senate bill, the bottom line effect on my family is this:

The direct effect on our tax bill appears to be minimal.

However, the indirect effects look negative.  These include:
  • an increase to the national debt that could lead to higher interest rates or larger tax increases in the future (or federal spending cuts).  
  • a decrease in home values (predicted by some to be a 10% decrease in our region), that might be partially offset by an increase in stock values.
  • negative effects on higher education that could affect me as an employee of this sector and parent of current and future college students
  • potential indirect impacts from increasing inequality, health insurance disruption, and other areas.
Putting aside my personal situation, as an economist, I do not support this bill for the reasons cited by most mainstream economists.  While there is a case to be made for some revenue neutral tax reform (i.e. cutting the 35% corporate rate, paid for by limiting deductions and broadening the corporate tax base), there is no case for deficit increasing tax cuts that further income inequality given current circumstances which include a) unemployment is nearly 4%, b) inequality is very high and rising, c) the economy is at/near potential, and d) the U.S. still has large budget deficit and record debt while facing very large increases in entitlement spending in the near future as the population ages. 

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