Wednesday, April 26, 2017

Glass Maybe an Eighth Full: The Trump Tax Proposal vs. The MITE

The White House released its one-page summary "tax reform" proposal today. MarketWatch has the full text.

The proposal calls for the standard deduction to be doubled.

In my opinion that's a good thing and kinda sorta in the spirit of The MITE. More on that below.

The rest of the stuff is, at best, orthogonal to The MITE proposals and there may be some real poison pill stuff in there.

For example, Trump proposes reducing the current seven tax brackets (10%, 15%, 25%, 28%, 33%, 35% and 39.6%) to three (10%, 25% and 35%). That's cool from a simplification standpoint, and of course the current top-bracket taxpayers are going to like it. But how many of the current 15% payers are going to get at least some of their income pushed up into the 25% bracket rather than down to the 10%? Ditto current 28% or 33% income falling into the 35% bracket instead of the 25% bracket? Devil, meet details.

A quick read of the proposal indicates that it is shaped, to a high degree, by a weird combination of protectionist macho flash and supply side voodoo. I'm not particularly impressed. But anything that lowers taxes in general is, in my opinion, a move in the right direction. And at least the idiotic "Fair" Tax didn't make it into the proposal. So anyway ...

Increasing the Standard Deduction vs. Increasing the Personal Exemption

I favor increasing the personal exemption because doing so leaves room for individuals to lower their taxes even more with itemized deductions. Raising the standard deduction instead of the personal exemption decreases such opportunities. Not all MITE supporters agree with me on that -- personal exemption versus standard deduction was a matter of debate when we put together the project.

As a practical matter, though, most of the people at the lowest income levels don't itemize even at the current standard deduction level -- they don't have a lot of money to spend on specifically deductible things like charitable contributions and home mortgage interest in amounts that would come to more than the standard deduction. So increasing the standard deduction, which they were going to go with anyway, does fulfill part of The MITE agenda of "bottom-up tax cuts."

On the other hand, this seems to be a one-shot plan, rather than a proposal for continuous tax-cutting. Like certain categories of spending, increasing the income tax liability floor should become "non-discretionary" -- that is, either the personal exemption or the standard deduction should go up every year, substantially and automatically, unless Congress specifically acts to stop the process. That way we don't have to fight over that particular tax-cutting methodology every year. It just happens.

Also, the administration's proposal does not address the heavily regressive FICA taxes with a "floor" so that poor males of color can stop subsidizing the retirement and health care costs of wealthy white women. That should be a priority.

Of course, today's summary is just a first shot across the "tax reform" bow. The administration will be hitting Congress with more specifics soon -- and Congress will be hitting right back. So if affecting policy by lobbying politicians is your kind of thing, it's time to call your congresscritters.

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