Wednesday, November 15, 2017

Thoughts on Tax Plan

I am trying to figure out how I would change the GOP tax plan if I could.

A few ideas (numbers based on bill as shown on Congressman Sam Johnson's website:

First, I think it would be better at this point not to end personal exemptions. Ending them largely undoes the effects of increasing the standard deduction, and might increase taxes on those that itemize. Unfortunately, that would increase the "cost" of the tax plan by $1,562.1 billion dollars over ten years, so it would have to be made up for to keep the total "cost" at the level that the reconciliation rules require. (Note: I don't know whether costs are calculated as if each proposal were done alone against the current system, or how that proposal would do if measured against the rest of the tax bill being passed without it, or what. However, I am fairly certain that you can't just add the numbers up to get the total cost as each section will have some effect on the other sections, but I'll pretend that the parts do not effect each other for purposes of estimating the effect of these policy changes).

I would make up for that in part by increasing the standard deduction only by 50%. I'll assume that this would approximately half the cost of the increase, which would give the government $460.7 billion more than the current House GOP plan.

Second, I would keep the estate tax, and keep the personal alternative minimum tax as it currently is. The former would get the government $172.2 billion and the latter $695.5 billion.

Third, I would ease up on the tax rate simplification. I would combine the two lower brackets into one 12% bracket, but leave leave the other brackets where they are (projected brackets for 2018), except that I would eliminate the 35% bracket, and set the threshold from the 33% to the 39.6% bracket at $425,000 for singles, $437,500 for heads of households, and $450,000 for married ($225,000 for married filing separately). This would mean that everyone would pay somewhat lower taxes, even after the exemptions phased out at higher incomes, and even if they itemized deductions, except for people who itemize deductions and have an income under $15,875.00 ($22,666.67 for heads of household and 31,750.00 for couples,). This would be resolved by giving singles/heads of households/couples who itemize deductions a tax credit of $2 for every $100 of taxable income up to $10,000/$15,000/$20,000 and then taking away $2 for every $100 up to $20,000/$30,000/$40,000.

I'm not certain how this would change costs, but with the current GOP plan reducing revenues by $961.2 billion, if it only reduced revenues by half as much, it would still add $480.6 billion compared to the current plan.

Overall, these changes (assuming the rate change has half the cost of the GOP plan) would add up to $1,809 billion, more than enough to keep the exemptions.

In addition, I would probably limit the amount of "pass-through" income treated as business income (page 3-4 of the tax plan) to some amount at or under a million dollars to allow this provision to be used mainly for small businesses. This would add to revenues compared to the current bill being proposed, although I am not certain how much.

Now, for things I would like to do if I could find the money in the plan: Keep the deductions for medical expenses.

I would keep the deduction for state and local taxes but limit it to somewhere between $25,000 and $35,000 for all state and local taxes combined.

If I could find the money, I would like to see some change in the alternative minimum tax the neighborhood of changing the rates from 26% and 28% to 24% and 30%, and changing the exemption phase out from 1/4 to 1/6 (i.e. you lose $100 exemption for every $600 of income over the threshold instead of $150). That would keep the highest effective marginal AMT rate at 35% (28% + 7% to 30% + 5%), and weight the tax away from lower earners to higher earners.

Extra money in the plan beyond this could be used to increase the standard deduction by as much as we could afford.

(There are other provisions in the tax bill that I am, in effect, leaving in place at this time. Maybe some of them should be changed; any of them that would have a significant cost to change would obviously have to be paid for somewhere, but I think this would be a better base to work from than the current plan). That is all.

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