Trump Tax Plan – Good, Bad & Ugly

I was skeptical, but the Republican-led senate will got 50 votes for the “Tax Cuts and Jobs Act.” The stock market is happy about the Trump Tax Plan, but most Americans are not. Only 33 percent of Americans are in favor of it, and 52 percent are opposed according to an average of nine surveys taken this month. That 19 percentage point split between support and opposition makes it the least popular major tax bill in over 30 years, and that included past tax-increases!

There are several reasons so many people don’t like the Trump Tax Plan, especially:

  1. The tax changes disproportionately benefit the wealthy. This comes at a time when income inequality is a major social issue and wealth is the most concentrated it has been since the 1920s. The top 1% of households have more than doubled their share of the nation’s income from less than 10% in 1950 to more than 20% today. The Tax Policy Center’s most recent analysis estimates that the average middle income taxpayer will see a 1.6% increase in after-tax income ($900). By contrast, the top 1% of households, earning $733,000 or more, would see a 3.4% increase in after-tax income ($50,000). This has led some well-regarded financial bloggers to refer to the bill as “Welfare for the Wealthy.”
  2. The bill is expected by almost every economic analysis to add at least $1 trillion to the deficit. The total federal deficit is expected to be close to $30 trillion by then, so: “What’s another trillion?” However, because of the projected deficit increase, Congress was required to include a “sunset” provision whereby all the individual tax law changes will lapse after the year 2025. The sunset provision was necessary to meet the Byrd Rule requirement that only allows Senate legislation to be passed with a simple majority as long as it does not result in net tax cuts beyond a 10-year period. (Otherwise, it requires 60 votes to prevent a legislation-stopping filibuster.) If the deficit projections play out, the reduced tax rates for corporations will remain, but the individual rates will return to their current (higher) levels in 2025.
  3. The bill is complicated and contains the usual shenanigans, such as dozens, if not hundreds, of subsidies and loopholes for special interests necessary to secure the vote of each Senator.

To be fair, several aspects of the Trump Tax Plan that make sense (IMHO), such as:

  1. Lower tax rates for corporations will make US corporations more competitive and more likely to base their operations here, keep their cash here, and register their intellectual property here. The additional cash flow could stimulate economic growth, which is the holy grail of economics and the entire argument for this tax plan. The likely impact on economic growth is subject to debate.
  2. Interest on home equity lines of credit will no longer be deductible. It was convenient to use home equity to buy cars and pay off credit cards, but tough to argue that the government should subsidize that.
  3. The mortgage-interest deduction is being limited to acquisition indebtedness of no more than $750k. Previously, the limit was $1 million. This is not good for high-priced real estate areas, but almost every economist will tell you that the mortgage-interest deduction is bad policy that subsidizes the wealthy and encourages overspending on housing.

NOTE: The revised mortgage-interest limitation only applies to new mortgages taken out after December 15, 2017; any existing mortgages retain their deductibility of interest on the first $1,000,000 of debt principal, and a refinance of such mortgages in the future will retain their $1,000,000 debt limit (but only for the remaining debt balance, and not any additional debt).

A couple of other notable details:

  • Medical expenses will be deductible under the new plan to the extent they exceed 7.5% of adjusted gross income. That deduction was originally on the chopping block. It not only survived, but the threshold was reduced from 10% to 7.5%.
  • Deductibility of all miscellaneous itemized deductions was eliminated. This includes tax preparation fees, unreimbursed employee business expenses (including the home office deduction), and sadly, investment advisor fees.
  • State income and property taxes will only be deductible up to $10k per year. The plan was to eliminate the deduction entirely, but a compromise was struck, limiting the deduction to $10k. This limit is the same regardless of whether you are single or married filing jointly.
  • The individual mandate (and potential tax-penalty) for not buying health insurance will be repealed beginning in 2019. This paid for a lot of the tax overhaul by eliminating the accompanying government subsidies for low- and middle-income families.

Tons of additional details are in the final bill, which is over 500 pages. This article is just a high-level snapshot. So what do you think? Would you vote for the Tax and Jobs Act if you were a congressperson?