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Unintended Consequences of Tax Reform

The tax reform bills working their way through the House and Senate are unfair and ill-thought-out on many levels. The extent to which Republicans are trying to defend it speaks volumes about the public’s hesitancy to believe anything these politicians claim about benefits. After all, we’ve been burned by them so many times that for most of us our attitude is it’s best to stay with the devil you know than the devil you don’t know. This was the public’s response to changes in the Affordable Care Act and it seems to be gaining in support in tax reform.

Let’s look at some of the provisions and I will analyze them from a fairness/equity/and common sense point of view.

Reduction of corporate tax rates

The Republicans would have us believe that trillions will be repatriated once the corporate income tax rate goes down from 35 percent to 20 percent. On paper, this may look right. In reality, U.S. multinationals are not going to shut down operations in Ireland or offshore locations to save 15 percent. Shifting operations costs money. Labor costs are cheaper in these tax-friendly countries. The companies have established strong markets. Think again, Republicans. No one believes in Adam Smith’s capitalism any more, except, perhaps, proponents of Ayn Rand’s philosophy.

Tax brackets

The Senate bill has seven tax brackets with the top rate declining from 39.6% to 38.5% for those earning $1 million and above. There’s no good reason to give those with the highest income a 1.1% reduction in their taxes. If they make $1 million, their taxes go down $11,000. Do they really need that to survive? It’s been reported that there are roughly 400,000 Americans earning $1 million or more each year. Now, this doesn’t mean their taxable income is $1 million because there are all kinds of deductions. Still, even if we used 50% of that number it would mean the Treasury could collect over $2 trillion each year by keeping the tax rate at 39.6%. This is a no brainer. A large part of these monies could be used for infrastructure development and modernization, a program that truly will create jobs rather than the elusive promises of economic development and job creation from tax reform or from U.S. companies repatriating funds back to the U.S.

Middle class taxes

Unless I’m missing something, it seems to me there are no tangible benefits for the middle class from the perspective of tax rates. Using the House and Senate bills, if you are a single taxpayer and earn at least $91,900, your marginal tax rate will be 28%. The marginal tax rate right now is 28% for $90,151 and above. This is hardly a blip on the tax fairness radar.

Home ownership

You may have heard about the capping of the mortgage interest deduction for new homes at $500,000. Granted, this is fortune in most parts of the country. Still, a capping of the interest deduction is bound to slow new home sales and could lead to a decline in economic growth that affects even those in low-housing-cost states. New home sales trigger lots of new jobs and any significant reduction in those sales has trickle down effects to many state economies. Add to that the elimination or capping of property taxes and we potentially will have a real problem sustaining economic growth.

Standard deduction

The doubling of the standard deduction to $24,400 for a married couple means that they would need their mortgage interest and other deductions (i.e. state and local taxes) to be less than $12,700 for the elimination of these deductions and doubling of the standard deduction to make sense. But, what’s the point here? Is it to allow taxpayers to file on a postcard by not needing to itemize? Or, is there some justifiable reason to not only cap some deductions but eliminate others such as medical expenses and casualty losses. I think politicians would hear a different tune from those dealing with life-threatening diseases and residents in hurricane-affected areas if they are asked about the deductibility of medical expenses or the casualty loss.

Charitable deductions

Do we really want to put charities at risk for continued research and development funding to look for cures to illnesses like Alzheimer’s? Even though the House bill retains this deduction, millions of Americans will be affected and may not contribute as before because the doubling of the standard deduction makes itemizing for charitable deductions less likely. There are unintended consequences here including the effects on a rapidly aging population.

According to the Alzheimer’s Association, of the estimated 5.5 million Americans living with Alzheimer's dementia in 2017, an estimated 5.3 million are age 65 and older and approximately 200,000 individuals are under age 65 and have younger-onset Alzheimer's. One in 10 people age 65 and older (10 percent) has Alzheimer's dementia. Let’s face it, most of us will be stricken by it or know someone who will be. Who will step in and make up for the shortfall if charitable donations decline? Not the government. We don’t want its help.

Student loan interest

Right now, you can deduct up to $2,500 per year in student loan interest. That will go away if the House has its way. How can this be justified when Americans owe over $1.45 trillion in student loan debt, spread out among about 44 million borrowers. That’s about $620 billion more than the total U.S. credit card debt. In fact, the average Class of 2016 graduate has $37,172 in student loan debt, up six percent from last year. So, let me get this straight. The cost of college has gone up astronomically over the past ten years yet Congress wants to do away with the one break students get from loaning money to go to college. This could have the unintended consequence of fewer people going to college and an increasingly under-or-uneducated workforce. Not a pretty picture to say the least.

What’s missing from both the House and Senate bills is heart and soul, and a common-sense approach to developing tax policy. These bills take a short-term view of “right and wrong” but have long-term negative consequences. The Republicans seem bound and determine to have “tax reform” this year but fail to see the real damage their plans will have years from now.

Blog posted by Steven Mintz, aka Ethics Sage, on November 27, 2017. Professor Mintz is Professor Emeritus from Cal Poly San Luis Obispo. Visit his website to find out more about his services.

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