What’s the first word that comes to mind when you think of tax reform? Probably boring, at least for most people. However, for people who are struggling every day to put food on the table, this is one of the most important issues that exists.
Recently, House Republicans released a bill regarding tax policy. This bill, if passed, looks to make major changes to existing tax policy for both individuals, families and companies.
Generally, there are two schools of thought on taxes: tax everyone very little and reduce government spending, or tax everyone very high and introduce a lot of government programs.
Conservatives usually tend towards less government spending, and liberals usually tend towards increased government spending. The problem lies in the fact that most people aren’t well-versed in tax policy and the macroeconomics of shifting these policies and even the people who have studied it their whole lives cannot predict exactly what will happen when new tax policies are written.
The new Republican tax plan hopes to shift tax brackets for income tax from the current seven brackets to a more simplified four. While a simpler tax policy sounds nice, the only people who really benefit from the changing brackets are people who make more than $156,150 gross income per year. Nearly everyone above that income rate stands to benefit. The only people who this bracket update doesn’t really affect is people making more than one million dollars per year.
While the tax brackets are being simplified, tax deductions and credits are being made more complex. The bill proposes an increase in the credit for taxpayers with children. While this sounds good, the key area where these cuts are being made up for is state and local tax deductions. Currently, people are able to deduct the state and local income tax they pay and the proposed bill will get rid of that ability. This mostly affects people living in areas of high taxes, mostly liberal states.
Also, the new bill proposes to entirely get rid of the estate tax. Estate taxes are the taxes that you know about if you are wealthy enough to be hit by them. When people try to pass on their estate to a family member or friend, if a certain value threshold is met, the estate is taxed. The cut is a move that looks to benefit wealthy families and increase the amount of wealth that is able to be passed down from one generation to the next. While Republicans would like to make people think that this policy is for small family farms, the reality is that the only people really benefiting from this would be multi-millionaires and their families.
The butter and bread of this tax plan lies however in the updates to how the tax structure currently works for businesses. Nearly 95 percent of businesses today are what is known as “pass-through entities.” Simplified, a pass-through business is one that is owned by very few people. Currently, pass-through businesses don’t get taxes directly; rather, the owners of the businesses pay taxes on the income from these businesses through the income tax brackets. The Republican tax bill proposes to create a 25 percent tax on all pass-through businesses. While this simplification may seem like a good thing for most businesses, it only helps about 1.7 percent of them. (This 1.7 percent is responsible for 40 percent of the total value of all pass-through businesses). One business that stands to benefit immensely from this plan is the Trump Organization. Currently, the Trump Organization’s profits are split amongst the owners and the owners then pay income tax on that money, amounting to 39.6 percent being taken as tax. If this Republican-sponsored bill were to pass, the Trump Organization would only have to pay a tax rate of 25 percent. With a revenue of 9.5 billion USD, this would decrease the amount that the Trump Organization owners would have to pay by nearly 1.4 billion.
Nearly every Republican congressman and senator sponsoring this bill will tell you that the tax policies proposed can only help middle- and low-income families and will simplify the current policies. That isn’t reality though. This tax plan serves to increase wealth amongst the already wealthy; there may be some benefits to middle class families in the form of tax deductions but that’s really just a distraction from the rest of the bill.
A simplification of tax policy doesn’t benefit anyone, it only helps people who already take advantage of the system by allowing them to squeeze through more and more loopholes.