Pro-Growth Tax Reform: Myth vs. Fact
The Trump administration and Republican congressional leaders released a long awaited tax reform outline that would finally fix our broken tax code. If passed, this recent proposal would grow the economy, create jobs and increase wages for American workers by 1) lowering and simplifying individual tax rates for all Americans, 2) cutting taxes for large and small businesses alike, 3) permitting tax-free entrepreneurship, 4) ridding the tax code of special interest handouts, and 5) ending the practice of double-taxing overseas profits made by U.S.-based companies who want to invest in America.
Myth: The GOP tax plan is a big tax cut for the wealthy.
Fact: The GOP tax plan is a tax cut for all Americans. Under the proposed tax framework, the current seven bracket system with rates of 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent, and 39.6 percent is reduced to just three brackets at simpler and lower rates of 12 percent, 25 percent, and 35 percent. In addition, this plan nearly doubles the standard deduction to $12,000 for single filers and $24,000 for married couples, resulting in an expanded zero percent bracket. This means that a family does not have to pay tax on the first $24,000 they earn. This is the biggest benefit to low and middle class families. Other details will come as tax-writing committees begin drafting the actual legislation.
Myth: The GOP tax plan is pro-business, not pro-worker.
Fact: The GOP tax plan cuts taxes for all businesses and that will benefit the American workers. Most empirical estimates conclude that labor bears between 75 percent and 100 percent of the corporate tax burden. Corporations pass the cost of the tax burden to their workers in the form of lower wages or to their customers in the form of higher prices. U.S. corporations employ 54.8 million hard-working individuals, more than half of Americans invest in the stock market, and almost 40 percent of corporate stock is owned through retirement plans. By cutting the corporate tax rate from 35 percent to 20 percent, and the pass-through rate from 39.6 percent to 25 percent, the GOP tax plan would result in higher wages for American workers and more return on investment for the millions of Americans saving for retirement and investing in our economy.
Myth: The GOP tax plan will blow a hole in the federal debt.
Fact: The primary driver of America’s growing debt is the federal government’s addiction to spending. Over the last ten years, the federal government has spent at a higher level than it ever has in American history. In fiscal year 2015, the federal government spent a total of nearly $3.7 trillion or almost $30,000 per U.S. household. The current rise in federal spending has resulted in $20 trillion in total national debt. Federal debt held by the public is now equivalent to 74 percent of the entire U.S. economy. While some politicians blame the rise of the national debt on lower taxes, (tax revenue as a percent of GDP is well above the historic average and baseline projections will continue to increase over the next 20 years), the problem is clearly irresponsible federal spending. The federal government has a spending problem, not a revenue problem.
Additionally, the GOP tax plan will generate economic growth that leads to increased federal revenue. Specifically, the GOP tax plan cuts the corporate tax rate, the small business tax rate, and allows for full and immediate expensing. These provisions will lead to higher levels of savings and investments – the two key components of economic growth. According to recent analysis, pro-growth tax reform has the potential to grow the economy by 10 percent over the next 10 years and increase the average American family’s wages by more than 7 percent or about $4,000 for someone earning $50,000 a year. At the end of the day, the purpose of tax reform is not to give the federal government more money, but to give the American people more jobs and higher paychecks. Increased federal revenue is a side effect of pro-growth tax reform, but the best way to reduce debt is to reduce spending.
Myth: Doubling the standard deduction will undermine the mortgage interest deduction, hurting homeowners and the real estate market.
Fact: Doubling the standard deduction benefits everyone including homeowners. While doubling the standard deduction will encourage homeowners to take the standard deduction over the mortgage interest deduction (MID), it does not necessarily mean homeowners receive less of a tax break. According to the National Association of Realtors (NAR), the average monthly payment for a mortgage is just above $1,000 totaling about $12,732 a year. Under the GOP tax plan, the standard deduction will be $12,000 for single filers and $24,000 for married couples. In addition, economic studies suggest that eliminating the MID — which this plan does not do — would lower housing prices, and potentially lead to an expanded first time homebuyer market for the real estate community.
Myth: Repealing the state and local tax deduction hurts middle class families.
Fact: The state and local tax deduction currently forces federal taxpayers in low-tax states to subsidize taxpayers in high-tax states. The biggest beneficiary of this provision are high-income earners, not middle class families, who live in states with high taxes. In practice, this provision incentivizes state and local governments to raise their tax rates since local voters can write off the high taxes and don’t hold their local politicians accountable. By eliminating this provision, Congress can lower tax rates for all Americans by as much as 16.4 percent and apply pressure on big-government states like New York, Illinois and California to lower rates on their taxpayers. The state and local tax deduction is bad policy and Congress should eliminate it as part of tax reform.
Myth: Repealing the death tax (estate tax) is a giveaway to the wealthy.
Fact: The death tax is an unjust form of double taxation that kills family owned businesses and farms. Most wealthy individuals avoid paying the death tax by putting their wealth in liquid assets, setting up various trusts or partnerships, or by making charitable donations and gifts. The hardest Americans hit by the death tax are family owned businesses and farms whose wealth consists of physical assets such as buildings and land. Repealing the death tax will correct this injustice and boost U.S. economic growth by more than $46 billion over the next 10 years and generate an average of 18,000 private-sector jobs annually. Dying should not be a taxable event.
Myth: The Alternative Minimum Tax (AMT) is a tax cut for the wealthy.
Fact: The AMT is an unnecessary complexity that is poorly designed. This provision requires certain individuals and businesses calculate their taxes two ways and pay the government the larger of the two amounts. In general, the AMT takes effect when deductions are “too large” relative to income. The AMT does its intended job poorly and inefficiently by burdening taxpayers with additional paperwork and raising little extra tax revenue. The GOP tax plan simplifies the tax code and ends special interest carve outs, making the AMT unnecessary.