Taxation Tuesday: What Is Even Happening Here

The current tax reform plan is complicated and earth-shaking in a downstream kind of way. It’s doing a lot from a monetary perspective, but it’s not fundamentally changing the way federal taxes work. It’s a familiar reform story: the entrenched status quo turns out to be made of concrete, so the reformers have to dig up plan B, and plan C.

There are two themes of this: first, that nothing is changing, and second, that all of it is.

Nothing is Really Changing

Even the biggest change in theory to how regular people file taxes—the doubling of the standard deduction—is accompanied by the elimination of the personal exemption. The doubling of the standard deduction is intended to be a break for the middle class and a strike for simplicity. The current standard deduction for single filer is $6,350. The bill bumps that to $12,000. Those who already don’t itemize, which is most people, would be able to take twice as much out of their tax burden as is currently permitted. And those who itemize because their deductible expenses are between $6,350 and $12,000 would get the maximum benefit without the pain of dealing with all those receipts.

The elimination of the personal exemption significantly changes that framework. Under the exemption, every person gets $4,050 off the top of their taxes. (Like many tax breaks, there’s a phaseout based on income, that currently clicks in at $261,500). That’s now gone. So, instead of getting another $6,000 dollars in deductions, single filers are actually getting $1,600. That’s not nothing, but it’s way less than double. Second, it kneecaps the point at which itemizing is worth it. People with between $6-$12k in deductible expenses currently deduct that on top of the personal exemption. This is a maxim of tax reform: those who benefit from the complexity do not have an interest in its simplification. Finally, it affects the tax status of children. The standard deduction is per filer, and the exemption is per person, including kids. I’m using the single-filing numbers because this is already complicated, but the consequences are easy to see. The math used to depend on how many people there were: if you have two kids, that’s an additional $8,100 acting as a sort of backdoor child credit. Under the current plan, whether you have kids is irrelevant.

This is a good encapsulation of the way big policy changes filter through to the media: flashy language, for a provision that mostly helps people, but in subtler ways, and with some consequences.

Everything is Changing Too Quickly

Another roadblock in front of getting an accurate read on what’s happening is how clearly fluid it all is. Let’s take a temperature check on one extremely simple provision: the top marginal tax rate for individuals. It’s currently 39.6%. (Quick hit on marginal tax rates: this doesn’t mean that people in that income bracket pay 39.6% of their entire income over to the government—it means they pay a base amount, calculated by the IRS, plus 39.6% on everything they earn above the threshold, which in 2017 was $418,400 a year for a single person and $470,700 for married filing jointly.) In the past 24 hours, Senator Collins called for the top individual rate to stay at 39.6% instead of dropping to 38.5%, as the current Senate bill does. The House bill, which passed out of committee last week and is theoretically headed to the floor, keeps the rate at 39.6%. President Trump suggested dropping the rate to 35%, but it was A. in a tweet and B. accompanied by a question mark, so no one has any idea what that means.

Tax reform is hard, and requires a lot of oxygen. There’s not much of it right now. Multiple senators, not running for reelection, are untethered from the apron strings of donors and home-state public opinion. National attention is focused elsewhere, mostly Alabama. The elimination of favored deductions, like the one for state and local income taxes, doesn’t cut across normal partisan fault lines. And all of this is backgrounded by the Byrd Rule, which means if the Senate wants to pass the bill with a simple majority, the bill can’t add to the federal deficit after its first decade of existence. This version does, so we’re not done here. Stay tuned.

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