Headline writers beware: statutory tax rates require context. And writing headlines about them without it makes you look silly.
Often, in a rush to be the first to break a story, reporters will make assumptions and report information without context. The result is often misleading or inaccurate coverage. The same seems to be happening with tax reform. Before the full tax reform plan is even out, reporters are already declaring who tax reform will hurt or benefit. Doing so is like trying to guess the plot of a book based on a single page.
A slew of articles such as this one have come out recently that declare that the forthcoming GOP tax plan will raise taxes on the lowest tax bracket from 10 percent to 12 percent while lowering taxes on the highest tax bracket from 39.6 percent to 35 percent. Based on that information alone, one would assume that the Republican tax plan will raise taxes on the poor while cutting taxes for the rich. Unconscionable, you say! Not so fast.
Trump’s tax plan would also double the standard deduction, or the amount that taxpayers can deduct from their tax liability if they choose not to itemize deductions. This year, the standard deduction is set to be $6,350. If that is doubled, the standard deduction would be increased to $12,700. That’s a tax cut, two percent increase to tax rates on the remaining income in this bracket notwithstanding.
The benefit to lower-income Americans could be even larger if other reform proposals make it into the final legislation. Expansions to refundable tax credits such as the earned-income tax credit and the child tax credit have been discussed, and both tax credits disproportionately benefit less wealthy Americans.
It’s also worth noting that increasing the standard deduction is actually a very progressive reform. Only 30 percent of filers itemized deductions in 2014. Of those who did itemize, over three-quarters reported an adjusted gross income (AGI) over $50,000, despite the fact that only 38 percent of all income tax filers in that year had an AGI over $50,000. Increasing the standard deduction disproportionately benefits lower-income taxpayers who do not generally attempt to itemize deductions.
Even the discussions of the cut to the top tax rate risk missing the mark without context. Wealthier taxpayers currently benefit from several tax deductions that lower-income taxpayers rarely receive any benefit from. The GOP blueprint has generally included eliminating these “subsidies for the rich,” and the amount of these deductions that is eliminated will determine the effect on wealthier Americans.
The GOP proposal will possibly eliminate the state and local tax deduction, a deduction for which 88 percent of the benefit goes to taxpayers with AGIs above $100,000 a year. It would also likely axe the mortgage interest deduction, another deduction that primarily benefits upper-income taxpayers. Eliminating these wealth subsidies makes sense from a policy standpoint, as well as mitigate the amount of a “tax cut” the rich receive.
Tax reform proposals are generally highly interconnected and must be analyzed holistically. Without such context, reporters risk providing highly misleading information to American voters.
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