The House Republicans are headed in the right direction with their federal tax plan proposal, but they have a long way to go. The proposal isn’t perfect, but it is not nearly as scary as some would lead us to believe.
As an example, USA Today ran a story this week regarding all of the itemized deductions that will go away. Only the well-off in this country can take advantage of them, but you should know they are going away. In 2016, the Tax Foundation reported that 68.5 percent of all households take the standard deduction. That means that nearly 7 out of 10 tax filers never even use these deductions.
According to the same report, of those who do actually itemize their taxes, a significant number of these tax filers make more than $200,000 annually. Of this minority group, 93.5 percent who make $200,000 or more are able to deduct more than the standard deduction.
Some of the deductions that might be eliminated under the plan include deductions for college sports boosters, employer-provided housing, and tax preparation fees. The reason most of us do not take more than the standard deduction is because most of us cannot spend enough on qualifying deductions to even justify itemizing our taxes.
The Tax Policy Center also reported in 2016 that families making more than $250,000 on average only deducted $5,459 for their home mortgage interest deduction. That means a married couple in this bracket still had to spend $7,242 out of their pockets before they could beat this deduction by $1. It’s proposed that the deduction doubles to $24,000.
The Tax Policy Center also reported a similar proposal discussed earlier in the year would increase the number of people taking the standard deduction. Of the 30 percent who currently itemize, 84 percent of them would now be eligible for the standard deduction. Under the new tax plan, that means less than 5 percent of all tax filers would be eligible for any of the deductions they are proposing to eliminate.
It is true that teachers would lose their ability to deduct school supplies under this plan. The $250 dollar deduction was irrelevant unless they are one of the itemizers most likely to deduct more than the standard deduction. As we already know, most of those eligible filers make more than $100,000 a year. It is not very likely any teachers are taking this deduction if there are any at all.
The biggest deduction that would be eliminated is the ability to deduct state and local taxes. This has been labeled by Democrats as an attack against blue states. Again, less than 30 percent of filers claim this deduction and more than half of these filers earn more than $200,000 a year – whether they live in red states or blue states. The argument opposing the elimination of this deduction should have you questioning the Democrats: Aren’t the Republicans supposed to be the uber-wealthy?
Because our taxing scheme is “progressive,” meaning taxes levied increase with higher incomes, nearly everyone will see some sort of tax savings in this plan. The largest group will be anyone earning more than $77,400 a year up to $999,999. Millionaires are the exception – with the deductions that are being eliminated, they actually will pay more despite the minor savings they will see on roughly their first million earned.
The most important aspect of the House plan is the reduction of the corporate tax rate from 35 percent to 20 percent. In exchange, they too are giving up a lot of business deductions, but in the end this is a tax rate that will make American companies competitive globally. These are savings that corporations can put into lowering product costs, raising salaries, or padding 401(k) plans through increased profits. Regardless of where these savings go, all three categories benefit us one way or another.
Having said all of that, the GOP plan is not perfect. It’s not even close. The plan still isn’t simple enough for taxpayers and there are many people who will see minor tax increases on the low end of their respective pay scales. The House Republicans could have done better on many aspects of this proposal. But it still should advance to the president.
The current tax code was more than 30, maybe even 60, years in the making. The GOP won’t fix it all over night. Making the necessary adjustments to pass this plan is a step in the right direction. Not passing it might be just as scary.