So What’s the Real Word on Taxes?

Like most things, it’s safe to say that the tax reform bill passed in December has both good and bad aspects of it.

During the debate on the bill, most of the opposition argued that it was a tax cut for the rich at the expense of the lower and middle classes.  But that’s too easy.  That argument is used when any tax bill that includes cuts is debated and the reaction this time, and this time it appears to be out of habit.  And this time it’s just not that clear cut.  So let’s dismiss that and look closer at the actual provisions of the law…

Like most things these days, the debate over the tax bill was partisan and heated.  So what does the new law really do?

For ease of discussion, we can review some of the more discussed aspects of the law first, and then talk about some of the lesser known but significant provisions.

Corporate Taxes

The most talked about aspect of the tax reform measure is the large cut in the corporate tax rate.  Large corporations are keeping much of their profits overseas and the hope is that the cut in corporate taxes to bring it more in line with Europe and other countries will bring some of that money back and would be passed on in the form of jobs and pay for workers.

In the roughly month and a half since the bill became law, over 100 large corporations have announced bonuses and/or pay increases for workers.  Apple has said it is going to bring just under $400 billion back into the US from overseas subsidiaries and accounts, and that would result in an additional $38 billion in taxes paid to the US government.  Yet the news is not totally positive.  Wal-Mart, for example, after announcing pay increases also announced plans to close a number of stores.

So the jury is still out. Though the quick response from corporations is surprising, that the response has been so broad also gives hope that the results will be as advertised, at least to some degree.

Individual Taxes On High Incomes

So what about individual tax rates—is it a tax cut for the rich?  Well, if the question is does it cut taxes for the rich, the answer in many cases is ‘yes’.  The top individual tax rate is cut but about 2.5%, which is about the same, though in some cases less than every other tax bracket.  The law also reduces estate taxes for some upper income people, though it doesn’t eliminate the estate tax altogether.  On the other hand, it increases taxes on the rich in some areas.  The mortgage deduction is eliminated for homes worth over $750,000 which obviously only the very wealthy can afford.  Similarly, the deduction for multiple houses was eliminated.  The property tax deduction for property taxes over $10,000 was also eliminated, which affects the very wealthy (although this will also affect middle class taxpayers in very high tax states).

Individual Taxes On Low Incomes

What has received much less publicity is what the tax law does for low income people.   And, frankly, that is pretty significant.  The lowest tax rate stays at 10% but the next tax rate is lowered by 3%, to 12%.   Sometimes all of the talk of tax rates is confusing and most of us don’t really know what tax bracket we are in.  So what is much more tangible to working families are two very significant provisions.  First,   the income level where you have to pay taxes was doubled.  Where a couple would pay taxes on earnings starting at roughly, $12,000, taxes aren’t paid now until income reaches roughly $24,000.  Additionally, the child tax credit is also doubled, meaning families with children will benefit except in cases of families with very high incomes.

There is still a lot of debate over what the overall effect of the new tax law will be, even among those generally in favor and those in Congress who may have voted for it.  Though it did eliminate a number of deductions in return for a cut in tax rates, in its final form it is probably more ‘tax cut’ and more limited ‘tax reform’.

But a couple of things we do know, and that is that it will drive up the federal debt by huge amounts.  And THAT will be a problem for sure.  Whether the benefits outweigh that are yet to be seen.  And the other thing we know is that it is not just a tax cut for the rich and it actually has a very large benefit for the very lowest income.  As a percentage, the lowest income households get the most benefit.  But, unfortunately, the ‘tax cuts for the rich’ mantra has apparently become such an ingrained reaction that some can’t help themselves and actually judge for themselves.

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