Who's Up for Paying Lower Taxes?
How about just three brackets, and a higher standard deduction coupled with eliminating other deductions?
You wanted tax reform? Well, it’s gonna be yuge, that we can tell you. The best. That was close to what Treasury Secretary Steve Mnuchin said Wednesday in announcing President Donald Trump’s tax reform plan — it would be “the biggest tax cut and the largest tax reform in the history of our country.” He’s not really exaggerating. We have more on the corporate tax plan and how it will boost the economy here, so let’s focus for the moment on individual reform.
There are a few key aspects: First, instead of the seven current income tax brackets, there would be just three — 10%, 25% and 35%. What income levels those apply to has not yet been determined. Second, the plan eliminates most deductions except the popular ones for mortgage interest, charitable donations and retirement savings. Instead, the proposal doubles the standard deduction for married couples to $24,000. Thus, more folks would earn more tax-exempt income and fewer people would itemize, simplifying tax filing and saving all kinds of time and money. Third, two of the most hated taxes of all would die — the alternative minimum tax and the death tax.
One deduction elimination that may not go over so well is the one for state and local income taxes. Those rates can be particularly high in blue states like New York and California, and while leftists want other people to pay high taxes, they won’t like having their bill raised a little. But this deduction essentially functions as a subsidy for high-tax states, and those of us who live in income-tax-free states like Tennessee won’t mind no longer granting this favor to New York.
Primarily, however, eliminating most deductions goes a long way to combatting the predictable leftist attack line — “tax cuts for the wealthy.” First of all, the higher income brackets pay most of the income taxes (the top 20% pay 84% of them), so of course rate reductions will benefit them most. But the deductions also benefit them most. People in the lower brackets don’t tend to itemize, so eliminating deductions and raising the standard deduction … wait for it … cuts taxes for the poor. In our view, the only downside to this is that even fewer Americans will pay federal income tax and more people will have no “skin in the game.” Political reality, however, leaves little hope for a tax system with a broader base.
Under the circumstances, we’re impressed with Trump’s proposal and we hope he works a little art of the deal to get it passed. Our economy needs it.