“We are going to give middle-class Americans a tax cut,” White House economic adviser Gary Cohn said in Thursday’s press conference.
We recognize that this is the intention of the White House and of congressional Republicans. But the current tax reform outline lacks details, and what details it does have spark concern that their “tax cut” could end up a tax hike for some people. There are political and economic perils here.
Doubling the standard deduction is a good way to cut and simplify taxes. But the outline specifies a tax hike that will negate this gain for families by eliminating the personal exemption and dependent exemptions. This could increase taxes for families with a few kids, depending on how the child tax credit is changed.
A family of five currently taking the standard deduction could see $8,000 more of income exposed to taxes under this plan. If that family currently deducts its mortgage interest and state and local taxes, then the added exposure is even bigger. This could leave them with a bigger tax bill than they have now.
It won’t necessarily happen, of course. Republicans may stretch the 12-percent rate high enough that many more people fall into it and their taxes go down. Perhaps Republicans will increase the child tax credit by enough to offset the loss of the exemption. Or maybe they will modify the phase-out of the exemption so that high-earners who aren’t wealthy yet will see no increase in taxes.
But these are all mysteries today. There’s no bill, and while Republicans are being precise about some things, such as a 20 percent corporate rate and a territorial tax system, the tax treatment of families is something they plan to work out later. Cohn on Thursday explicitly refused to give even “a range” of the increase in the child tax credit.
Hiking taxes on middle or upper-middle-class families with children would be hard to justify on policy grounds. What is the economic or policy problem solved by making the median married-family household in Maryland, earning about $109,000, pay a few thousand more in taxes?
Politically, it’s worse. Republicans under Trump are having trouble retaining the support of soccer moms and the professional class that populates many suburbs. Hiking their taxes to pay for lower rates on the seriously wealthy won’t help.
One source of danger for the upper-middle class and lower-middle class is Republicans’ needless insistence on reducing the number of brackets. Three brackets are neater than seven, but that’s hardly a priority. Loopholes, exemptions, and exceptions to exemptions are the source of complexity. Numerous brackets neither creates distortions nor adds to complexity.
Consolidating brackets would mean money taxed at 10 percent today would be taxed at 12 percent under the bill. With an increased deduction and the reduction of the 15-percent rate this probably won’t mean a tax hike for many. But for some working-class earners it could, depending on the details.
As the tax plan becomes a bill, a tidal wave of lobbying from realtors, banks, offshore corporations, and others will try to bowl over lawmakers. The most important people Congress needs to look after, though, are the families, who could get burned by a detail or two being wrong.
The public will judge this bill, Trump adviser Gary Cohn said, on “How much do they get to keep? How much goes in their pocket versus how much goes to the government?”
Cohn is right. So, Congress needs to get the details just right. A bill that raises taxes on middle-class families won’t pass Congress, nor should it.
