GOP Bill Increases Inequality and Bankrupts Government

"They ain't teachin' taxes in school. It don't even matter I was actin' a fool" -Chance the Rapper

I always laugh to myself when people complain about not learning something in school, because I feel as if most people don't pay attention in school to begin with. I doubt taxes will captivate the attention of the average high schooler any more than learning that the mitochondria is the powerhouse of the cell. Also, to do someone's taxes you have to be a CPA, which requires a professional degree, or at least a certified tax preparer which also requires additional education. Most people don't know this, but I actually did become a tax preparer prior to last tax season. I did not file anyone's taxes, in part because the company wanted me to show up in December and spend all day in the office and only clock in if someone came in to file their taxes with their final pay statement of the year. Most people file with their W-2s that they don't get until January or February. So, they wanted me to come in and not get paid and I wasn't for that. I also thought we were overcharging people to have someone who replied to a Craigslist ad do their taxes, when they could do it for less with Turbo Tax and low income people can have their taxes done for free through organizations like United Way. For me, filing taxes is largely about putting the right information in the right boxes and following instructions. But, that's also how I see everything. I'll never forget when a philosophy professor said Mitch Verboncoeur were like robots. Given people's general anxiety about filing taxes and the reaction to House Republicans new tax plan, I'm beginning to think maybe it is worth charging people so much to do their taxes.


via GIPHY

If you look at form 1040, the way our tax system works, in lines 7-22 you list your income. This includes wages and salaries, refunds from state and local taxes, money from contracts, business gains or losses, capital gains or losses, gambling winnings, and just about all other forms of income. From this, you can deduct certain expenses, such as moving expenses, student loan payments or contributions to a retirement savings account, to determine your adjusted gross income. From this you subtract either the standard deduction ($6350 if single or married filed separately, $12,700 if married filed jointly, or $9300 if filing as head of household) or you may itemize your deductions; you may not do both. Then you subtract the exemption of $4300 for yourself, your spouse if married filed jointly, and your first four dependents. This determines your taxable income which is then applied to our progressive tax (more on progressive taxes later). We also have an alternative minimum tax to prevent wealthy people from having so many itemized deductions that they reduce their tax burden too low. From this we apply non-refundable tax credits, such as the child tax credit, which can reduce your tax burden to zero, but not below; additional taxes such as the insurance mandate penalty; and refundable credits, such as the earned income tax credit, which can reduce your tax burden below zero so that the government owes you money. You subtract your tax burden from any taxes you've already had withheld and the government either gives you a refund or you pay the government your additional taxes owed. Simple enough.

For real people, the GOP's tax plan does several things. First the number of tax brackets is reduced from seven to four. It also reduces the tax rates for these brackets except for the highest. The plan eliminates the $4300 exemption and many deductibles for AGI, and many itemized deductions. However the plan increases the standard deduction from $6350 in 2017 to $12000 for single people and those married filed separately, and from $12700 to $24000 for those married filed jointly. I haven't seen anywhere what the standard deduction will be for those filing as head of household, but presumably they will see an increase as well. The plan also eliminates the alternative minimum tax, and increases the amount exempt from the estate tax, before phasing the estate tax out altogether.

Most people, because of the increase in the standard deduction, which 70% of applicants use, and the overall reduction in tax rates will pay less in taxes. For single people with no dependents, they would now deduct $12000 from their AGI, instead of $10,400 (standard deduction plus exemption). For those married filing jointly, they would now deduct $24000 from their AGI, as opposed to $20800. Because the exemption is eliminated, people with dependents will have a higher taxable income than before, but they would be paying lower taxes on that income, and the non-refundable child tax credit is increased to bring their tax burden closer to zero. It is important to note that the increase in the child tax credit is temporary in order to make the bill passable through the Senate under budget reconciliation. Republicans intend to make the increase permanent in the future, but it is temporary in the bill.

The plan will affect different people differently, depending on which deductions they normally take advantage of and to what extent they do so. It will also affect people differently during different years. For example, people will no longer be able to take advantage of the non-refundable adoption credit, but this credit only applies when you adopt a child. So you might pay more than you would have one year, or any year you adopt a child, but less in every other year. Many of the objections I've seen to the bill, are actually changes that only affect the wealthy. For example I've seen objections to the reduction in the limit one can claim on the home mortgage deduction. However, this reduction from $1m to $500k only affects people whose home was initially valued at over $500k, people who are definitively wealthy. Another common objection is to the state and local tax deduction. While 43 states have some form of state tax income tax, most people don't take advantage of this deduction because it is an itemized deduction. For some people who itemize, it might now be more beneficial to use the standard deduction.

For people filing as single. Household Quintile info from Tax Policy Center (2015)

It's disingenuous to say this bill is a tax cut for the rich paid for by the middle class. Rather, it's just a big tax cut. Yes the higher your income the greater the tax cut, but that's because of how progressive taxes work. Any tax cut at the lower level is also seen by people at higher levels. I think many people think that in a progressive tax, the more money you make the more you pay in taxes. While that is technically true, I think they believe that in the old brackets, if you make less than $9325 you pay 10% in taxes, if you make between $9326 and $37950 you pay 15% and so on and so on. If that were the case, it would be better to make slightly below the upper limit of a bracket than above it. Instead, it is more accurate to say that as you make more money you pay higher taxes on that new money. So rich people and poor people alike would pay 10% on their first $9325 and pay more only on the income that falls between each bracket. This bill will put more money in most Americans pockets. For this reason, I would not be surprised if the GOP saw their goal of 4% GDP growth, in the short term.

It's hard to argue against putting more money in more people's pockets, but this bill is still problematic. For starters, in the short-term it will increase inequality. Because of the overall tax reduction, the elimination of the alternative minimum tax, and the increased exemption from and ultimate elimination of the estate tax, the wealthy will be able to keep more money and pass it along to their scion. Also, while we may see increased GDP growth, there is no reason to expect that those gains will continue to only be realized by the wealthiest of us. This is because of the reduction in the corporate tax rate and taxes on pass through entities. While I agree only real people pay taxes, only people who have equity in businesses will see gains from the reduced corporate tax rate. We already have the worst inequality we have ever seen in this country. There is no need for the government to increase it.

No, @nytdavidbrooks tremendous gains are not going to the top 20%. They are going to top 1%. Key to understand GOP.https://t.co/vm7j66QrxW pic.twitter.com/DKc38X8f6S

— Gabriel Zucman (@gabriel_zucman) June 27, 2017

Also, because this bill is a massive tax cut, it will have a huge impact on the government's ability to pay the interest on it's debt and make public investment. Due to this, the Tax Policy Center "found that after four decades, GDP would be 0.4% lower, because of the increased debt burden." This bill is part of the conservative effort for government so small you can drown in your bathtub.

I have seen some push back against this long-term argument about the debt. Their counter-argument is two-fold. First, they argue that deficit spending is good because it redistributes the wealth. Secondly, because we have a fiat currency and the money our government owes is in the same currency it prints, inflation is not high enough for it to matter if the government simply prints more money to pay its debt.

Zero understanding that the budget deficit is literally the mechanism through which GOVT delivers financial surpluses to others. https://t.co/g1Zm09wrC7

— Stephanie Kelton (@StephanieKelton) November 5, 2017

To their first argument, they oversimplify what deficit spending is. A deficit is caused by either a reduction in revenue or an increase in spending. This bill does not increase spending, it simply takes less revenue, disproportionately less from the rich. Therefore, it does nothing to positively redistribute the wealth.

To their second argument, again they oversimplify the relationship between our government and money. Because we have separation of powers, Congress taxes and spends money independent of the Treasury Department printing money and the Federal Reserve disbursing. Also, they ignore what we mean by "long-term." While it may be the case that inflation is not high now, the best definition of long-term, rather than defining it by a set period of time, is a time when conditions are different. We will see recessions in the future and the government will need to increase spending to keep the economy afloat. For this reason, I still agree with the Keynesian principle of surpluses during booms, and deficits during busts.

It is hard to argue against putting more money in people's pockets, especially when many struggle to get by. However, most Americans need a raise more than they need a tax cut. Also, I disagree witht that common notion that people know how to spend money better than the government. We all know how to best pursue our own idiosyncratic preferences, but I doubt most of us think about the macro-economy when we spend our hard-earned money. This bill increases inequality in the short and long-term, and greatly restricts our government's ability to function in the long-term and must be defeated.

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