President Trump has proposed a new tax plan, simplifying and cutting income taxes. It also would stop subsidizing state income taxes by removing the deduction for them. The obvious losers are the high-tax mostly Democrat-majority states and tax accountants making a living navigating the complex tax laws. Democrats are, of course, panicking about the dangerous cuts.
The narrative around this is that it would be a tax cut for the rich. That’s a bit misleading; the “rich” generally mean the top half, and as Romney so famously spouted, 47% don’t effectively pay taxes.
Following this, the House of Representatives passed a budget that aligns with these goals, mostly along party lines.
What do you need to know?
- This probably won’t become law. It will be the Democrats plus Republicans from high-tax states such as NY and NJ (there aren’t any in California to speak of) against Trump and the remaining Republicans. So it’s probably mostly negotiation.
- Tax cuts do not mean less tax revenue. Taxes discourage behavior. We tax cigarettes to curtail smoking. When we heavily tax businesses, people start fewer of them. Lowering taxes to stimulate the economy was called “Supply Side Economics” 35 years ago, and may have been a significant factor in ending the recession that the Jimmy Carter era lead us into.
If taxes are lowered 10% but the economy improves 20% as a result, the net is that tax revenue rises 8% as a result
- Are they give-aways to the rich? Not really; the poor don’t pay taxes, so of course tax cuts don’t impact them. Only people paying federal taxes would be see reduced and simplified taxes. Taking less from someone isn’t the same as giving them more.
- Estate Tax: This proposal would eliminate the estate (also called “death”) tax. This may increase small business investment, as currently the estate tax is so steep that often children must sell the store, house, farm, etc. to pay off the taxes, and therefore owners liquidate beforehand. And, importantly, the estate tax is double-taxation; income tax was paid when initially earned. But by definition it only applies to inheritance. Many liberals oppose what they consider to be the entrenched privilege that inheritance enables, as well as considering any significant inheritance to be a sign of being rich anyhow.
- Corporate Tax Rate: The U.S. has, at 39.6%, the highest corporate tax rate among industrialized nations. Thus, many corporations take their business overseas. This bill would reduce the rate to 20%, with the intent of encouraging businesses to stay in the U.S. But if your world-view is that the corporations are U.S. property anyhow and profits are evil, that looks like a give-away to the rich.
The White House is estimating that this cut would increase the GDP (a very good thing) by 3 to 5%. Take that with a grain of salt; the Tax Policy Center (a reliably far-left analysis group) guesses the opposite. Neither has a great track record.
- What are Federal Income Taxes used for?
According to The Center on Budget and Policy Priorities
- 26% – Healthcare (Medicare, Medicaid, CHIP)
- 24% – Social Security
- 16% – Defense
- 9% – Assistance – AFDC (welfare), child tax credits, SNAP (food stamps), school meals.
- 6% – Interest on the Federal Debt
- The rest includes Veterans benefits (and health care), education, transportation, etc.
Note that health care, social security and assistance make up 59% of the budget, and none of these are in the Constitution. Defence [sic] is covered in the Preamble and in Section 8, Powers of Congress. (The term “welfare” is used, but had a different meaning back then; it meant basically protection from crime and oppressors, rather than assistance.)