Anticipating Panic About Tax Reform

I noticed in passing a sense of panic among a number of people over the proposed GOP tax reform plan.  I went on line to try to find the source of the information and found articles from January and April of this year and from August 2016 (based on campaign promises), but nothing about a current proposed plan.  I finally tracked down the source of the information, a local newsletter with no references cited.

The newsletter was consistent with those older sources, warning of the loss of itemized deductions and personal exemptions as the standard deduction is raised to $24,000 from the 2016 level of $12,600.  The tone was the same.  Loss of those deductions (medical expenses, state income and property taxes, home mortgage interest, gifts to charity, casualty and theft losses, and some job expenses) would be a hardship on the middle class.  This got me thinking about taxes and deductions.

Several references told me that 45% of households pay no income taxes at all.  These are typically those who don’t earn enough (not the rich using loopholes).  Their attitude should be, “Reform away; we don’t care!”

Another source tells that only about 30% of filers use the itemized deduction.  That means that only about one in six households has any stake in the outcome of this debate.  And most of those are in the upper income range.  As this graph shows the 30% average becomes 60% for those above 75k, almost 80% for those in the 100k to 200k earnings range and almost 95% for those households making over 200k per year.  The number who shouldn’t care increases to 5 out of 6.

Next let’s look again at itemized deductions vs. the standard deduction for a sample lower income family.  Remember, itemizing only starts to matter once you hit the standard deduction, because that is what you get anyway without doing anything or keeping any records.  On top of that, medical expenses don’t count until you have spent 10% of income.

For a household making $68,000 per year, approximately 20% above average, under the old plan they would subtract $12,600 and $4050 for each exemption (use $12,150 assuming a family of 3) and pay 15% of the remaining $43,250.  Under the new plan they would subtract $24,000 and pay at only 12% of the remaining $44,000.  How high would their itemized deductions have to be under today’s system to pay the same amount?

Surprisingly the answer is $32,800 (plus $6,800 more if the medical bills are used to qualify) in itemized deductions!  That’s an unusually high number of deductions for a fairly modest income.  It’s logical to conclude that any low to middle income family hurt by this would be a rare exception.

So what we are left with is speculation on what the proposal would look like and typical exaggeration about how many it would hurt and how severely.  From this cursory overview it seems the ones who would be most affected are those who buy big, expensive houses or who give to charity as a tax strategy rather than out of generosity or those unfortunates with very high medical expenses.

The problem is that I doubt anyone will look at it even this thoroughly.  Instead the parties will fight back and forth expressing shock and outrage (more outrage!) at the “rhetoric” of the other side.

Think of how easy it would be for someone to post a simple spreadsheet form on line and let each family calculate the difference between any new proposal and the current system.  This way after filling in a few numbers, everyone would know approximately where they stood without the breathless hyperbole and political spin.  Does anyone want to bet we see this kind of critical thinking scenario instead of the usual anxious generalizations about hurting the middle class or favoring the rich?