Toe the Line: College Republicans | A great start — with room for improvement

By Michael Bogdanos 10/02/17 12:22am

Few topics in national politics are as long, complicated and dull as the United States Federal Tax Code. Equally few topics, however, are as important to the lives of all Americans. Considering this importance, we must swallow its “boringness” to analyze President Trump’s new tax plan and the literally life-changing contents it contains.

The nature of the plan, however, makes formal scrutiny difficult. The framework released is exactly that —a general framework for a new tax code. It is therefore scarce in detail and exact figures, meaning that its analysis is hardly an exact science. Nonetheless, we can still analyze this framework on a broader level, through its impact on three crucial categories: the simplicity of the tax code, individuals and families and, lastly, businesses.

The plan’s first main selling point is its simplicity. The current tax code is atrociously long — around 75,000 pages. Its various deductions and complications pave the way for corporate loopholes, lost production and lobbyists for special interest groups. In fact, the White House estimates that each year taxpayers spend nearly 7 billion hours and over $250 billion in compliance costs. The new plan removes all but two itemized deductions each for individuals and businesses. This simplification alone would vindicate most tax plans.

The plan’s second primary goal is the relief it claims to offer individuals and families. Somehow, both liberal and conservative think-tanks and policy centers have published concrete numbers that they expect families to save. These numbers, including those that claim the wealthiest “1 percent” will make hundreds of thousands of dollars beg the question: How do they know? The plan does not specify the ranges of the tax brackets, meaning that any formal quantitative analysis is pure speculation. We will stick to what we know.

First, the plan nearly doubles the standard deduction ($12,000 for single-filers and $24,000 for married couples filing jointly). In other words, the plan stipulates that you get to keep the first $12,000 you make, tax-free. It effectively creates a 0 percent tax bracket significantly larger than that which the current tax rates create. In fact, this deduction covers the entirety of the current plan’s 10% bracket. Therefore, any claims that individuals paying 10 percent now will soon be paying 12 percent (the first bracket in the new plan) are completely unfounded. Anyone paying 10 percent now will soon be paying nothing, a clear and definitive boost to the most disadvantaged American citizens.

Second, the plan affords Congress the option of creating a fourth, higher tax bracket. The attractiveness of this option depends heavily on the ranges of the first three brackets. Essentially, this option should be employed only if it is necessary to keep the plan revenue neutral. According to the Organization of Economic and Co-operation and Development, America’s tax system is already the most progressive of any industrialized nation. The rich already pay above and beyond their fair share in taxes — the top 20 percent of earners in this country pay 84 percent of the income tax. Taking from them simply because they can afford the loss is not the way to fix poverty in America. That said, they are not the ones who need a tax break the most. If budgetary constraints make maintaining upper and middle class tax breaks mutually exclusive, Congress should enact this fourth, higher tax bracket.

Third, the plan only maintains itemized deductions for mortgage payments and charitable donations. Why mortgage payments remain deductible calls attention to the President’s partiality for real estate. More importantly, however, is what is not included — namely, state and local tax deductions. Put simply, these deductions mean that the amount you pay in state and local taxes is subtracted from your income when you file federal taxes. In principle, removing this deduction means that you will pay taxes multiple times on the same dollar. In practice, it places an unfair burden on middle class residents of high-tax states like California and New York. This goes against all logic, as the cost of living in these states is significantly above the national average. $200,000 gets you a lot farther in Montana than in Manhattan. A balanced system that accounts for the real value of taxpayers’ income should be taking less from residents of these states, not more. 

The plan’s third and final goal is to lower the tax burden on businesses. Small businesses have long been burdened by excessive taxation that limits their growth and stifles opportunity for American consumers and workers. This plan aims to fundamentally change this burden, stipulating a maximum 25 percent tax rate for pass-through businesses (i.e. businesses that are currently taxed at the same rate as their owners). The risk, however, is that it opens the door for tax evasion, as business owners in higher tax brackets may declare personal income as business profit, thereby paying 25 percent as opposed to 35 percent. While the plan vaguely promises to adopt measures to prevent against this tax evasion/recharacterization, it offers no concrete solution. Without such a solution, this maximum rate will presumably result in tax evasion that undoes the progress made by closing deduction loopholes.

The plan also lowers the corporate tax rate to 20 percent. This lower rate will incentivize domestic corporate growth by reducing tax avoidance and offshore sheltering. More important, however, are the specific incentives offered. The plan allows businesses to deduct research-and-development costs and to write-off investments in depreciable assets (i.e. capital), making the marginal tax burden of capital investment zero, and therefore incentivizing capital investment. The importance of this reduction in cost cannot be understated. GDP growth has stagnated around 2 percent for the last decade. The United States needs an economic boom, like those that followed the tax cuts of the Kennedy and Reagan administrations. Increased capital investment drives up efficiency and productivity, which in turn drive up GDP. Additionally, an increase in worker productivity increases worker value, which will lead to a raise in real wages, which have been largely stagnant since 2001. In fact, the wage and production benefits are so important, that in face of budget constraints, these deductions and write-offs should be prioritized over a lowered corporate tax rate.

In summary, this plan’s main benefits come from its simplification, its higher standard deduction, and its investment incentives. To make this plan viable, however, Congress must address the possibility of a fourth bracket, the risk of tax evasion through the maximum pass-through rate, and the removal of state and local tax deductions. The American people can only hope that Congress will patch the errors in this plan, as our country is in desperate need of tax reform and dynamic, sustainable economic growth.

MICHAEL BOGDANOS is a College sophomore and a co-chair of the College Republicans Editorial Board.