A married couple would owe Uncle Sam zero income tax on its first $33,500 under President Trump's proposed tax plan. This provision, which would swell the ranks of Mitt Romney's "47 percent" has many virtues. Here are three:
- Expands the income-tax-free "zero-percent" bracket to include millions more people. The current standard deduction is $12,700. Doubling it would make the standard deduction $25,400. Throw in a pair of personal exemptions ($4,050 each), and a married couple is at $33,500 before it owes any federal income tax (payroll taxes and other taxes are another story) — that's with no child tax credits. This is good. A low-income family shouldn't be forced to pay taxes until they have needs taken care of.
- Cuts taxes for everyone who takes the standard deduction. More than two-thirds of taxpayers take the standard deduction as opposed to itemizing their deductions according to the Tax Foundation, and these households are overwhelmingly in the lower three quintiles of income. That is, wealthy people are far more likely to itemize their deductions. All of those households will see a cut, not merely those couples below $30,000 or singles below $15,000. A married couple earning $80,000 and taking the standard deduction (presumably they are renters) would see a $1,905 tax cut (the extra $12,700 in deduction times their 15 percent marginal rate).
- Push more people into the standard deduction, reducing itemization. A higher standard deduction is a win for tax simplification. Mostly, people these days deduct their mortgage interest. But if the standard deduction is $25,400 for a couple, a lot fewer people will itemize. For instance, if you bought a $360,000 home with a $300,000 mortgage at a 4.5 percent rate, you would expect to make $13,320 of interest payments in the first year. So even if you made no charitable contributions, you would, under current law, itemize. Under the Trump plan, it would make no sense to itemize, and so you would take the standard deduction. Even a considerably larger mortgage might not justify itemizing.
This makes tax time easier for more people. More importantly, it removes perverse incentives. When folks make investment decisions based on tax preferences, it distorts and slows the economy. Also, the subsidy for mortgages drives up home prices, as subsidies tend to do. This dampens that effect for most homes in America, reducing the government's upward pressure on the costs of buying a house.
This proposal will have many critics, from those who dread knocking folks off of income tax rolls to anyone hoping for more expensive homes — or those who will gripe that some upper-income folks may get a tax cut from this as well. But it's good policy.
Timothy P. Carney, the Washington Examiner's commentary editor, can be contacted at email@example.com. His column appears Tuesday nights on washingtonexaminer.com.