Tax reform is now the order of the day. Congressional Republicans have been eager all year to rewrite the tax code. Slashing and simplifying taxes is, they believe, the straw that stirs our economic drink. Get this right, they say, and America will enter a new golden age of fast growth.
This might well be true. But the details of their tax proposal will pose many political problems for the GOP. Too many provisions give the impression that the party cares more about helping the well-off than about aiding average Americans and their families.
This is because the plan’s immediate benefits heavily tilt toward corporations and the rich. Large corporations would get more than a 40 percent cut in their tax rates, from 35 percent to 20 percent. Smaller, privately held businesses would see a similar decline, from as high as 39.6 percent to 25 percent. Economists argue about the effect of these changes on the national economy, but the political import is clear: Combined with a proposed cut in the top rate on labor income from 39.6 percent to 35 percent, liberals will enjoy saying that the well-to-do will fare well under the GOP plan.
Whether or not these tax reductions would lead to more jobs, the immediate effect is that the average worker would not fare so well. The plan raises the lowest rate of tax from 10 to 12 percent, meaning some working-class workers will see a slight raise in their tax rates. Middle-income workers will at best see a modest drop in the tax rate they pay, from 15 to 12 percent. Compared with what the wealthy get right away, that’s small beer.
The plan’s authors point to a near doubling of the standard deduction most taxpayers take. However, the plan also eliminates the personal exemption all taxpayers currently take for each member of their household. If you have two or more children, the increase in the standard deduction is smaller than the amount of the exemptions you will lose. Taxes for big families may go up.
Plan authors say they will take care of this by increasing the amount of the child tax credit, but have not provided any guess as to how much that increase will be. That leaves average people wondering whether they will get the tax cut they expect.
Furthermore, the plan does away with the mortgage interest deduction for most taxpayers by eliminating the deduction for state and local taxes. That’s because families only deduct their interest if the total amount of their itemized deductions, including deductions for mortgage interest and state and local taxes, exceeds the amount of the standard deduction. Under the Republican plan, only families paying more than $24,000 a year in mortgage interest and charitable donations, combined, will be able to deduct those expenses from their income taxes. Since most people don’t spend that much on those items, they will have lost their most valuable deduction.
The result: Upper-middle-income families will see their taxes go up. Most people making less than $50,000 a year will see little or no change. The people in the middle don’t have enough information to know if they are winners or losers. That’s not good politics.
Republicans have always suffered from the perception that they care more about the rich than the common man. Their tax plan might help the common man in the long run by increasing investment and business activity. But the current plan looks like a much better deal for the rich than for the average people who put Donald Trump in the White House.
In politics, perception can quickly become reality. Republicans should deal with this problem before it’s too late.
Henry Olsen is a senior fellow at the Ethics and Public Policy Center.