The Gang Tries Fixing the Tax Code

[Shadows]

trump wants :
Massive tax cuts, which will raise the deficit.
Massive infrastructure spending, which will raise the deficit.
Considerable increase to the military budget, which will raise the deficit.

What the hell is the orange-haired clown thinking ?

The thinking is that we'll grow our way out of the deficit.

Basically the tax cuts combined with spending increases will boost GDP therefore incomes will rise so tax revenues go up, less people are unemployed and on government services so spending will decrease, etc. which in the long run will balance the budget. Also tax cuts means more people will keep more of their income which will act as an incentive to work even harder which further increases tax revenue and boosts GDP. A big giant virtuous cycle ensues.

Does it work? Not really.

There is no major incentive to work hard which will change everything with lesser taxes, I don't think they can even claim that, there is no proof or claim of that anywhere.

They could argue that there maybe some boost in GDP growth if you put more money in people's pockets which is technically true but here the net effect on the middle class is small who will be the one's spending, so huge push to GDP in unlikely. And even if it is, there is something called tax to GDP which will fall further. Even if the GDP rises, the tax recouped will be small. There is no way in hell they can EVER make up for a 6T $ tax cut even if hypothetically GDP growth rose by 1 or 2%.

I would argue any GDP growth will be short-term & small ! And as interest rates go up, paying off this extra 6T $ will be a challenge. This is not a time 1-2T $ Infra investment but a 10 year period tax cut atleast. There will be further cuts to the middle & low income class programs down the line creating a situation where the elites hoard all the cash with little money among the middle class. Good luck having high Economic growth then !

[The_Doctor]

Extended thought riff.

1. Will this be bad for the deficits? Yes. Has the Republican Party, since Reagan, cared about deficits? No. They have routinely gotten away with huge tax packages and seen good economic times succeed (1981, 2001). The model is to cut taxes and worry about the deficits when the Democrats win power. This time, it may really backfire by upping our debt and when the debt-based crisis hits, we may see a lot of these tax cuts reversed. But no, the GOP does not care because this is a 'tomorrow' problem, not a 'today' problem. This majority was built on tax cuts and postponing the day of reckoning on deficits. Reagan's farewell address contains the seeds of destruction for the GOP majority (he explicitly refers to debt and deficits as a long term problem).

2. Will this pass? Yes. Expect virtually every House and Senate Republican to back this. I'd expect 240 votes in the House for this, 55 in the Senate (with 3 blue dog Democrats joining).

3. Why? Simple. The business community will align behind this, especially small businesses and a good chunk of the electorate. Trump has gone on a massive vote buying spree to notch a win. The business side of this tax package is very pro-business (and as a Wall Street libertarian, I love it, less so on the deficits). The standard deduction and child tax credit is designed to win support from House and Senate Republicans via reconciliation by making it politically popular with their constituents. The business community will push strongly for this.

On the downside, the elimination of most itemized deductions is going to hit some people harder, but they will hit the rich harder. Most middle class and poor people use a standard deduction, not an itemized deduction. So this was politically shrewd by the Trump Administration to shift more of the tax burden on the rich.

It will also clear Congress because tax reform and cuts are one of the few things the Republican Party can do well and has enough broad support from the majority coalition. They need a win and this package contains a lot of goodies. The territorial tax system will also win a broad swath of support from Wall Street as well and business types.

This, by the way, is what Trump should have opened with, not healthcare. I assumed his political operation was smart enough to emulate Reagan and W. Bush, who opened their presidencies with major tax changes.

4. Long term consequences? When the economic storm hits by 2020-2024, the Republican Party will be out of options because they have utilized every strategy to pump economic growth and boost businesses. The debt based crisis we are heading towards will require massive infusions of revenue, which the GOP obviously, painfully, has sidelined us on.

5. My personal hot take. For this to be most effective, pass the business side of the tax package but leave the individual rates unchanged and do not repeal the AMT or estate tax. The net package would boost productivity and economic growth. It would be smarter to use the revenue to fund long term investments like community college, that can in turn, boost our tax base while growing wealth more equitably. There is no long term benefit to cutting individual tax rates, because they are already historically low. You're not going to get much economic growth from going from 39% to 35% for the top bracket (which is a 4% decrease, not a huge deal to many people making that kind of money). Most of the middle class don't pay income taxes, either, cf. Mitt Romney.

I can see the business side being far more successful, but the estate tax repeal and the individual rates being a flop. The business tax side probably will encourage a lot of companies to reinvest in the US and bring their money back. I don't see the individual tax changes being substantive enough.

The dumbest thing about this proposed tax package is that the math doesn't add up ... our deficits will explode, and with Medicare costing more starting in 2018, we are facing a real debt and deficit crisis in the 2020s.

[ProudModerate2]

Also you've pointed out mortgage interest deduction - what about property tax deduction? The memo says "protect home ownership...deductions". Removing the property tax deduction would be a huge tax hike.

If it is true that trump is doubling the amount of the standard deduction, then in most cases for middle class citizens, it would be worthless/unnecessary for tax payers to itemize their deductions.
The way tax law works, is that you only itemize deductions, if you can prove that it is more (higher) than the standard deduction that you can take.

So if the new standard deduction is double the amount it use to be, and if itemized deductions are reduced to just two "items" (mortgage interest and chartable contributions), then for most Americans, taxes will be filed using the standard deduction.

Under trump's new tax plan, only the few (mainly the RICH AND WEATTHY) who buy very large homes or mansions, would actually itemize their deductions. (Also regarding trump's new tax plan ....) Some middle class citizens might itemize the first 3-5 years or so, since their monthly mortgage payments are mainly interest in the early years of their mortgage (home loan), but I assure you this is not a significant amount of "normal" people.

[Shadows]

Extended thought riff.

1. Will this be bad for the deficits? Yes. Has the Republican Party, since Reagan, cared about deficits? No. They have routinely gotten away with huge tax packages and seen good economic times succeed (1981, 2001). The model is to cut taxes and worry about the deficits when the Democrats win power. This time, it may really backfire by upping our debt and when the debt-based crisis hits, we may see a lot of these tax cuts reversed. But no, the GOP does not care because this is a 'tomorrow' problem, not a 'today' problem. This majority was built on tax cuts and postponing the day of reckoning on deficits. Reagan's farewell address contains the seeds of destruction for the GOP majority (he explicitly refers to debt and deficits as a long term problem).

2. Will this pass? Yes. Expect virtually every House and Senate Republican to back this. I'd expect 240 votes in the House for this, 55 in the Senate (with 3 blue dog Democrats joining).

3. Why? Simple. The business community will align behind this, especially small businesses and a good chunk of the electorate. Trump has gone on a massive vote buying spree to notch a win. The business side of this tax package is very pro-business (and as a Wall Street libertarian, I love it, less so on the deficits). The standard deduction and child tax credit is designed to win support from House and Senate Republicans via reconciliation by making it politically popular with their constituents. The business community will push strongly for this.

On the downside, the elimination of most itemized deductions is going to hit some people harder, but they will hit the rich harder. Most middle class and poor people use a standard deduction, not an itemized deduction. So this was politically shrewd by the Trump Administration to shift more of the tax burden on the rich.

It will also clear Congress because tax reform and cuts are one of the few things the Republican Party can do well and has enough broad support from the majority coalition. They need a win and this package contains a lot of goodies. The territorial tax system will also win a broad swath of support from Wall Street as well and business types.

This, by the way, is what Trump should have opened with, not healthcare. I assumed his political operation was smart enough to emulate Reagan and W. Bush, who opened their presidencies with major tax changes.

4. Long term consequences? When the economic storm hits by 2020-2024, the Republican Party will be out of options because they have utilized every strategy to pump economic growth and boost businesses. The debt based crisis we are heading towards will require massive infusions of revenue, which the GOP obviously, painfully, has sidelined us on.

5. My personal hot take. For this to be most effective, pass the business side of the tax package but leave the individual rates unchanged and do not repeal the AMT or estate tax. The net package would boost productivity and economic growth. It would be smarter to use the revenue to fund long term investments like community college, that can in turn, boost our tax base while growing wealth more equitably. There is no long term benefit to cutting individual tax rates, because they are already historically low. You're not going to get much economic growth from going from 39% to 35% for the top bracket (which is a 4% decrease, not a huge deal to many people making that kind of money). Most of the middle class don't pay income taxes, either, cf. Mitt Romney.

I can see the business side being far more successful, but the estate tax repeal and the individual rates being a flop. The business tax side probably will encourage a lot of companies to reinvest in the US and bring their money back. I don't see the individual tax changes being substantive enough.

The dumbest thing about this proposed tax package is that the math doesn't add up ... our deficits will explode, and with Medicare costing more starting in 2018, we are facing a real debt and deficit crisis in the 2020s.

Hi, I think we have a lot of differences but I think there is a lot of scope for consensus here. One thing which I disagree is that the 35% tax thing from 39%. While it may not boost growth & will cause revenue loss, it is a core Republican promise to cut taxes for everyone including the uber rich & the GOP donors so it has to be there in a way if Trump has to have a tax cut plan. I do agree about the estate tax & AMT!

About the Corporate Tax, i think most major countries have a rate around 25 to 33% odd, which is why a 25% to 30% was much more sustainable. I don't agree with the 15% tax big job growth theory but even if did, it will cause other countries to sharply cut rates because the differential will be too high (too low corporate tax rate for US) & then we are back to square 1. Ultimately what it is leading is a march to 0% Corporate tax & loss of entire revenue which will shift it to ordinary people.

I think one of the key thing for Corporate investment is demand in the market. Even if a low tax rate encourages investment in say plants producing Cars or electronic items, etc - Do people have the money to spend otherwise all this is pretty useless. The net benefit to the middle class is marginal compared to the estate tax & other giveaways for the uber rich. I think the possibility of the Top (say) 3-5% hoarding huge money could be a big challenge in the future for domestic demand.

Debt thing, you have well covered. My main issue is that stimulus, infra are 1 time things while this will go on for 10 years. And interest rates are rising after a historic low so more n more portion of the budget will go to interest payment! Also the Federal Reserve is unlikely to support this harsh cut as it could prop up sudden 1 time demand & lead to rapid inflation (basically unstable sudden inflation) & it is going to play havoc in them deciding their monetary policies. So expect a sharper interest rate rise from the Fed, which will grow the deficit & anger Trump more !

[ProudModerate2]

I would really like to see numbers (of projected deficits) from the CBO, but I'm not sure if the CBO can work-off of such "crude" and simple statements of what the orange-haired clown has proposed.

[Ronnie]

2. Will this pass? Yes. Expect virtually every House and Senate Republican to back this. I'd expect 240 votes in the House for this, 55 in the Senate (with 3 blue dog Democrats joining).

Are you just assuming Democrats won't filibuster?  Keep in mind that reconciliation bills have to be revenue neutral over 10 years.

[The_Doctor]

2. Will this pass? Yes. Expect virtually every House and Senate Republican to back this. I'd expect 240 votes in the House for this, 55 in the Senate (with 3 blue dog Democrats joining).

Are you just assuming Democrats won't filibuster?  Keep in mind that reconciliation bills have to be revenue neutral over 10 years.

Isn't there a rule that only 51 votes are needed for reconciliation bill abd that's it? I thought the Bush tax cuts passed this way even though they weren't revenue neutral.

[Ronnie]

2. Will this pass? Yes. Expect virtually every House and Senate Republican to back this. I'd expect 240 votes in the House for this, 55 in the Senate (with 3 blue dog Democrats joining).

Are you just assuming Democrats won't filibuster?  Keep in mind that reconciliation bills have to be revenue neutral over 10 years.

Isn't there a rule that only 51 votes are needed for reconciliation bill abd that's it? I thought the Bush tax cuts passed this way even though they weren't revenue neutral.

Oh sorry, I got confused.  Apparently, non-deficit neutral reconciliation bills just have a 10-year sunset provision.  My mistake.

[The_Doctor]

Hi, I think we have a lot of differences but I think there is a lot of scope for consensus here. One thing which I disagree is that the 35% tax thing from 39%. While it may not boost growth & will cause revenue loss, it is a core Republican promise to cut taxes for everyone including the uber rich & the GOP donors so it has to be there in a way if Trump has to have a tax cut plan. I do agree about the estate tax & AMT!

To be honest candidate Trump referenced his tax reform strategy. He said he would start low and the Democrats would push the rates up. A reduction from 39% to 35% seems…symbolic for a group making hundreds of thousands of dollars. It's a 4% tax reduction -- in comparison W. cut it 6%. Reagan got it down to 28%, Bush 41 31%.

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I believe that nominally we have the highest corporate tax rate in the world or among them. Effectively they're lower but for businesses who have foreign income, they would pay a 35% tax rate on the income if the host nation had a tax rate lower than 20%.

As for the rest of the world I think the 15% is in line with the general tax rate so I don't see why they'd cut it further. We're also shifting to a territorial tax system under the proposal which creates, in effect, a 0% tax rate on foreign investment which may benefit the United States.

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No real disagreement here.

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Reasonable to say so I don't disagree too much.

[mvd10]

Like TD said: itemized deductions massively benefit the wealthy (only a third of taxpayers actually itemize and it will be even less if the standard deduction is doubled) I'm sure raising the standard deduction and cutting the tax rates will compensate any tax hike for the middle-class.

I would accept a (big) reduction in revenues it was massive tax reform (like replacing the corporate income tax and payroll taxes with a VAT) but this is just too expensive. Creating a 15 percent tax rate for pass-throughs will be the biggest tax shelter ever. The individual reforms will add too much to the deficit while not really adding up much to economic growth. Income tax rates are fairly low now (unlike in the 80s) and cutting corporate income taxes (and maybe capital gains taxes) will work much better. I'm not sure if everyone noticed it, but this year a lot of Republican tax plans focused on cutting taxes on capital instead of slashing income taxes like Reagan and Bush did, I guess they got the memo. Cutting the corporate income tax rate to 15% will be expensive and I'd prefer if they find a way to pay for it (cutting loopholes won't cut it), but it's better than nothing. Territorial taxation is an amazing idea and they should have done it long ago.

Bottom line: I would vote for the corporate tax cut and territorial taxation, and against everything else (maybe the reduction in income tax rates if they make it revenue neutral). But in the end the debt problem needs to be solved. The US doesn't need to balance the budget at all costs, but the debt to GDP ratio should be kept sustainable, and taxes probably will have to raise to do that (combined with entitlement reforms ofcourse).

[Shadows]

Hi, I think we have a lot of differences but I think there is a lot of scope for consensus here. One thing which I disagree is that the 35% tax thing from 39%. While it may not boost growth & will cause revenue loss, it is a core Republican promise to cut taxes for everyone including the uber rich & the GOP donors so it has to be there in a way if Trump has to have a tax cut plan. I do agree about the estate tax & AMT!

To be honest candidate Trump referenced his tax reform strategy. He said he would start low and the Democrats would push the rates up. A reduction from 39% to 35% seems…symbolic for a group making hundreds of thousands of dollars. It's a 4% tax reduction -- in comparison W. cut it 6%. Reagan got it down to 28%, Bush 41 31%.

You must be logged in to read this quote.

I believe that nominally we have the highest corporate tax rate in the world or among them. Effectively they're lower but for businesses who have foreign income, they would pay a 35% tax rate on the income if the host nation had a tax rate lower than 20%.

As for the rest of the world I think the 15% is in line with the general tax rate so I don't see why they'd cut it further. We're also shifting to a territorial tax system under the proposal which creates, in effect, a 0% tax rate on foreign investment which may benefit the United States.

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No real disagreement here.

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Reasonable to say so I don't disagree too much.

OECD Average is 25%, Weighted by GDP the average is around 30%. 25-30% should be the corporate tax rate. Japan, France, Belgium have above 30%, Australia, Germany, Spain, Mexico, Portugal all at 30%, a host of Scandinavian countries around 25% (all of whom have much higher income taxes). Even China is at 25%. 15% would be the lowest in the world for a major country bar Ireland. IMO that is way too low & burns up trillions of $ for no good reason. Also all of these countries have a VAT/GST, a sales tax which adds trillions of $ in revenue. Unless you look at the revenue side, there is no solution to the debt issue !

Anyways, a significant Fed Rate hike may kill any short-term incentive of lower corporate tax rate making borrowing more expensive. I get the federal income tax argument but Reagan had a higher tax rate when he cut it,didn't have huge debt, deficits & could afford to go down. HW actually had to increase taxes & none of these people cut corporate taxes to this low a figure. I actually don't even mind if they bring top income tax down to 33% for a short while as long as they don't do away with estate tax & AMT.

The current Corporate Tax proposed IMO is totally irresponsible & will blow up the deficit.

[GeorgiaModerate]

Dropping the top corporate rate from 35% to 15% seems drastic.  Why not just increase the breakpoints for the different rates?  This would help all businesses, particularly the smaller ones, without raising the deficit as much.

[riceowl]

Also you've pointed out mortgage interest deduction - what about property tax deduction? The memo says "protect home ownership...deductions". Removing the property tax deduction would be a huge tax hike.

If it is true that trump is doubling the amount of the standard deduction, then in most cases for middle class citizens, it would be worthless/unnecessary for tax payers to itemize their deductions.
The way tax law works, is that you only itemize deductions, if you can prove that it is more (higher) than the standard deduction that you can take.

So if the new standard deduction is double the amount it use to be, and if itemized deductions are reduced to just two "items" (mortgage interest and chartable contributions), then for most Americans, taxes will be filed using the standard deduction.

Only the few (mainly the RICH AND WEATTHY) who buy very large homes or mansions, would actually itemize their deductions. Some middle class citizens might itemize the first 3-5 years or so, since their monthly mortgage payments are mainly interest in the early years of their mortgage (home loan), but I assure you this is not a significant amount of "normal" people.

That's nice.

I currently fall in the 25% bracket. I took $20,000 in deductions last year. They were fairly evenly split between mortgage interest, property tax, and charitable giving. Deleting the property tax deduction puts me roughly at the standard deduction assuming I contribute the same amount to charity. And my tax bracket won't change. So, this is a tax hike for me.

And no, interest isn't huge "just in the very beginning." Interest makes up more than half for the first, well, half of your mortgage's life.
All that to say this removes an incentive to home ownership that I can only see causing less demand and falling house prices.
Stupid. (Not you )

[#gravelgang #lessiglad]

That's nice.

I currently fall in the 25% bracket. I took $20,000 in deductions last year. They were fairly evenly split between mortgage interest, property tax, and charitable giving. Deleting the property tax deduction puts me roughly at the standard deduction assuming I contribute the same amount to charity. And my tax bracket won't change. So, this is a tax hike for me.

And no, interest isn't huge "just in the very beginning." Interest makes up more than half for the first, well, half of your mortgage's life.
All that to say this removes an incentive to home ownership that I can only see causing less demand and falling house prices.
Stupid. (Not you )

This is great for people who own their home outright, or have made a majority of payments on their house, but detrimental to relatively new homeowners. As you pointed out, it is also harmful to home values. In other words, it favors boomers at the expense of younger voters.

2. Will this pass? Yes. Expect virtually every House and Senate Republican to back this. I'd expect 240 votes in the House for this, 55 in the Senate (with 3 blue dog Democrats joining).

Are you just assuming Democrats won't filibuster?  Keep in mind that reconciliation bills have to be revenue neutral over 10 years.

Isn't there a rule that only 51 votes are needed for reconciliation bill abd that's it? I thought the Bush tax cuts passed this way even though they weren't revenue neutral.

Oh sorry, I got confused.  Apparently, non-deficit neutral reconciliation bills just have a 10-year sunset provision.  My mistake.

This is correct. Paul Ryan's parliamentary team, however, thinks that corporate tax reform would sunset after two years, given that it is not revenue neutral after 10 years. I will find a link.

Link: http://www.slate.com/blogs/moneybox/2017/04/25/donald_trump_s_corporate_tax_cuts_can_t_pass_congress.html

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—George Callas, Senior Tax Policy Advisor to Paul Ryan

Also you've pointed out mortgage interest deduction - what about property tax deduction? The memo says "protect home ownership...deductions". Removing the property tax deduction would be a huge tax hike.

If it is true that trump is doubling the amount of the standard deduction, then in most cases for middle class citizens, it would be worthless/unnecessary for tax payers to itemize their deductions.
The way tax law works, is that you only itemize deductions, if you can prove that it is more (higher) than the standard deduction that you can take.

So if the new standard deduction is double the amount it use to be, and if itemized deductions are reduced to just two "items" (mortgage interest and chartable contributions), then for most Americans, taxes will be filed using the standard deduction.

Only the few (mainly the RICH AND WEATTHY) who buy very large homes or mansions, would actually itemize their deductions. Some middle class citizens might itemize the first 3-5 years or so, since their monthly mortgage payments are mainly interest in the early years of their mortgage (home loan), but I assure you this is not a significant amount of "normal" people.

It's plenty of normal people. You're also (currently) able to deduct state and local taxes in itemized deductions. This plan harms new homebuyers in areas of the country where home prices and cost of living is high.

It's a giveaway to the very wealthy, to older voters, to voters living in states with low income taxes, and to rural voters with a low cost of living. Almost like they designed a plan specifically to harm people who didn't vote for him.

[ProudModerate2]

If it is true that trump is doubling the amount of the standard deduction, then in most cases for middle class citizens, it would be worthless/unnecessary for tax payers to itemize their deductions.
The way tax law works, is that you only itemize deductions, if you can prove that it is more (higher) than the standard deduction that you can take.

So if the new standard deduction is double the amount it use to be, and if itemized deductions are reduced to just two "items" (mortgage interest and chartable contributions), then for most Americans, taxes will be filed using the standard deduction.

Only the few (mainly the RICH AND WEATTHY) who buy very large homes or mansions, would actually itemize their deductions. Some middle class citizens might itemize the first 3-5 years or so, since their monthly mortgage payments are mainly interest in the early years of their mortgage (home loan), but I assure you this is not a significant amount of "normal" people.

It's plenty of normal people. You're also (currently) able to deduct state and local taxes in itemized deductions. This plan harms new homebuyers in areas of the country where home prices and cost of living is high.

It's a giveaway to the very wealthy, to older voters, to voters living in states with low income taxes, and to rural voters with a low cost of living. Almost like they designed a plan specifically to harm people who didn't vote for him.

Ooops. My fault.
I was not clear in my statement.
What I meant was that : Under trump's new tax plan .... Only the few (mainly the RICH AND WEATTHY) who buy very large homes or mansions, would actually itemize their deductions.

I will go back up to my original post, and fix it, so that it does not confuse others.
Thanks for pointing it out.
My last paragraph should have read like this .....

Under trump's new tax plan, only the few (mainly the RICH AND WEATTHY) who buy very large homes or mansions, would actually itemize their deductions. (Also regarding trump's new tax plan ....) Some middle class citizens might itemize the first 3-5 years or so, since their monthly mortgage payments are mainly interest in the early years of their mortgage (home loan), but I assure you this is not a significant amount of "normal" people.

[riceowl]

That's nice.

I currently fall in the 25% bracket. I took $20,000 in deductions last year. They were fairly evenly split between mortgage interest, property tax, and charitable giving. Deleting the property tax deduction puts me roughly at the standard deduction assuming I contribute the same amount to charity. And my tax bracket won't change. So, this is a tax hike for me.

And no, interest isn't huge "just in the very beginning." Interest makes up more than half for the first, well, half of your mortgage's life.
All that to say this removes an incentive to home ownership that I can only see causing less demand and falling house prices.
Stupid. (Not you )

This is great for people who own their home outright, or have made a majority of payments on their house, but detrimental to relatively new homeowners. As you pointed out, it is also harmful to home values. In other words, it favors boomers at the expense of younger voters. 

Well not exactly. Property taxes are the same whether you're a new or old home-owner. Since mortgage interest is remaining as a deduction, that favors younger home buyers. All home buyers are fairly equally screwed by the property tax deduction removal.

[#gravelgang #lessiglad]

That's nice.

I currently fall in the 25% bracket. I took $20,000 in deductions last year. They were fairly evenly split between mortgage interest, property tax, and charitable giving. Deleting the property tax deduction puts me roughly at the standard deduction assuming I contribute the same amount to charity. And my tax bracket won't change. So, this is a tax hike for me.

And no, interest isn't huge "just in the very beginning." Interest makes up more than half for the first, well, half of your mortgage's life.
All that to say this removes an incentive to home ownership that I can only see causing less demand and falling house prices.
Stupid. (Not you )

This is great for people who own their home outright, or have made a majority of payments on their house, but detrimental to relatively new homeowners. As you pointed out, it is also harmful to home values. In other words, it favors boomers at the expense of younger voters.  

Well not exactly. Property taxes are the same whether you're a new or old home-owner. Since mortgage interest is remaining as a deduction, that favors younger home buyers. All home buyers are fairly equally screwed by the property tax deduction removal.

Yes, I wasn't clear. Raising the standard deduction will favor homeowners who no longer pay a substantial amount of interest on their mortgage, who skew older and/or wealthier. Eliminating the deduction for state and local taxes (which includes property taxes) generally hurts the wealthier in high tax states, which skew blue.

Take, for instance, a couple of examples. A 25 year old couple who purchased a $400k house in Illinois and the same couple at 60, who also own a 400k house, which is paid off, living in Wyoming. Let's assign a household AGI of 100k to each. In the young person example, we would expect them to pay 18k in mortgage interest in year 1, based on a typical amortization schedule, plus about 10-12k in Illinois property taxes, depending on their exact location. Under the current tax law, they itemize and have up to 30k in these deductions. Under the proposed law, they would be capped at the 26k standard deduction (18k in mortgage interest deduction is insufficient to be worth it to itemize). This couple is out probably around $1,000 (4k difference in deductions times an estimated ETR of 25%) just due to this tax "cut." Now, let's take the elderly Wyoming couple. Wyoming's typical property tax rate is less than a half a percent, thus they pay only $2k in property taxes, and with the house paid off, they do not deduct mortgage interest payments. As such, we would expect them to take the standard deduction under both the current and proposed plan. This couple would pay around $4k less in taxes (12k times the same 25% ETR). From an economic standpoint, this is an inefficient use of the tax code to redistribute money, from young to old, and from high cost of living areas to low cost of living areas.

Edit: this also doesn't even address the negative impact of home values due to the effective elimination for all but the most wealthy of the interest deduction.

[mvd10]

That's nice.

I currently fall in the 25% bracket. I took $20,000 in deductions last year. They were fairly evenly split between mortgage interest, property tax, and charitable giving. Deleting the property tax deduction puts me roughly at the standard deduction assuming I contribute the same amount to charity. And my tax bracket won't change. So, this is a tax hike for me.

And no, interest isn't huge "just in the very beginning." Interest makes up more than half for the first, well, half of your mortgage's life.
All that to say this removes an incentive to home ownership that I can only see causing less demand and falling house prices.
Stupid. (Not you )

This is great for people who own their home outright, or have made a majority of payments on their house, but detrimental to relatively new homeowners. As you pointed out, it is also harmful to home values. In other words, it favors boomers at the expense of younger voters. 

Well not exactly. Property taxes are the same whether you're a new or old home-owner. Since mortgage interest is remaining as a deduction, that favors younger home buyers. All home buyers are fairly equally screwed by the property tax deduction removal.

Yes, I wasn't clear. Raising the standard deduction will favor homeowners who no longer pay a substantial amount of interest on their mortgage, who skew older and/or wealthier. Eliminating the deduction for state and local taxes (which includes property taxes) generally hurts the wealthier in high tax states, which skew blue.

Take, for instance, a couple of examples. A 25 year old couple who purchased a $400k house in Illinois and the same couple at 60, who also own a 400k house, which is paid off, living in Wyoming. Let's assign a household AGI of 100k to each. In the young person example, we would expect them to pay 18k in mortgage interest in year 1, based on a typical amortization schedule, plus about 10-12k in Illinois property taxes, depending on their exact location. Under the current tax law, they itemize and have up to 30k in these deductions. Under the proposed law, they would be capped at the 26k standard deduction (18k in mortgage interest deduction is insufficient to be worth it to itemize). This couple is out probably around $1,000 (4k difference in deductions times an estimated ETR of 25%) just due to this tax "cut." Now, let's take the elderly Wyoming couple. Wyoming's typical property tax rate is less than a half a percent, thus they pay only $2k in property taxes, and with the house paid off, they do not deduct mortgage interest payments. As such, we would expect them to take the standard deduction under both the current and proposed plan. This couple would pay around $4k less in taxes (12k times the same 25% ETR). From an economic standpoint, this is an inefficient use of the tax code to redistribute money, from young to old, and from high cost of living areas to low cost of living areas.

Edit: this also doesn't even address the negative impact of home values due to the effective elimination for all but the most wealthy of the interest deduction.

If there is any inefficient use of the tax code to redistribute money it is the mortgage interest deduction itself.

But you probably are right about the politics behind all of this. Trump and his team know that repealing the state and local tax deduction is a big tax increase on wealthy people that didn't vote for him and probably never will, while he can use it to cut taxes for everyone (including his voters).

[#gravelgang #lessiglad]

That's nice.

I currently fall in the 25% bracket. I took $20,000 in deductions last year. They were fairly evenly split between mortgage interest, property tax, and charitable giving. Deleting the property tax deduction puts me roughly at the standard deduction assuming I contribute the same amount to charity. And my tax bracket won't change. So, this is a tax hike for me.

And no, interest isn't huge "just in the very beginning." Interest makes up more than half for the first, well, half of your mortgage's life.
All that to say this removes an incentive to home ownership that I can only see causing less demand and falling house prices.
Stupid. (Not you )

This is great for people who own their home outright, or have made a majority of payments on their house, but detrimental to relatively new homeowners. As you pointed out, it is also harmful to home values. In other words, it favors boomers at the expense of younger voters. 

Well not exactly. Property taxes are the same whether you're a new or old home-owner. Since mortgage interest is remaining as a deduction, that favors younger home buyers. All home buyers are fairly equally screwed by the property tax deduction removal.

Yes, I wasn't clear. Raising the standard deduction will favor homeowners who no longer pay a substantial amount of interest on their mortgage, who skew older and/or wealthier. Eliminating the deduction for state and local taxes (which includes property taxes) generally hurts the wealthier in high tax states, which skew blue.

Take, for instance, a couple of examples. A 25 year old couple who purchased a $400k house in Illinois and the same couple at 60, who also own a 400k house, which is paid off, living in Wyoming. Let's assign a household AGI of 100k to each. In the young person example, we would expect them to pay 18k in mortgage interest in year 1, based on a typical amortization schedule, plus about 10-12k in Illinois property taxes, depending on their exact location. Under the current tax law, they itemize and have up to 30k in these deductions. Under the proposed law, they would be capped at the 26k standard deduction (18k in mortgage interest deduction is insufficient to be worth it to itemize). This couple is out probably around $1,000 (4k difference in deductions times an estimated ETR of 25%) just due to this tax "cut." Now, let's take the elderly Wyoming couple. Wyoming's typical property tax rate is less than a half a percent, thus they pay only $2k in property taxes, and with the house paid off, they do not deduct mortgage interest payments. As such, we would expect them to take the standard deduction under both the current and proposed plan. This couple would pay around $4k less in taxes (12k times the same 25% ETR). From an economic standpoint, this is an inefficient use of the tax code to redistribute money, from young to old, and from high cost of living areas to low cost of living areas.

Edit: this also doesn't even address the negative impact of home values due to the effective elimination for all but the most wealthy of the interest deduction.

If there is any inefficient use of the tax code to redistribute money it is the mortgage interest deduction itself.

But you probably are right about the politics behind all of this. Trump and his team know that repealing the state and local tax deduction is a big tax increase on wealthy people that didn't vote for him and probably never will, while he can use it to cut taxes for everyone (including his voters).

If one were designing a tax code from nothing, yes. The deduction is economically inefficient and encourages ownership over renting, when ordinarily, there should be no preference.

At the same time, however, there exists a strain of behavioral economist who would strongly argue that neutering an 80 year old pillar of the tax code would lead to consumers / taxpayers making irrational decisions over a short time horizon.

In short, it shouldn't have existed in the first place, but effectively removing it now would lead to unjust outcomes for millions of taxpayers based on making past economic decisions predicated on its continuing availability.

[vote for pedro]

I disagree that this tax cut is "bad for the deficit."  The CBO will probably score this statically and portray it as a reduction in revenue, but the truth is that tax cuts increase revenue due to increased economic activity.  Tax revenues under Reagan increased from $517B in 1980 to $909B in 1988 with two huge tax cuts.  The reason the deficit also increased was due to increased spending, not decreased revenue.

https://www.thebalance.com/current-u-s-federal-government-tax-revenue-3305762

[jaichind]

I disagree that this tax cut is "bad for the deficit."  The CBO will probably score this statically and portray it as a reduction in revenue, but the truth is that tax cuts increase revenue due to increased economic activity.  Tax revenues under Reagan increased from $517B in 1980 to $909B in 1988 with two huge tax cuts.  The reason the deficit also increased was due to increased spending, not decreased revenue.

https://www.thebalance.com/current-u-s-federal-government-tax-revenue-3305762

I think without knowing which income levels match which brackets (the 10 25 35 rates) we will not know for sure

[Virginiá]

I disagree that this tax cut is "bad for the deficit."  The CBO will probably score this statically and portray it as a reduction in revenue, but the truth is that tax cuts increase revenue due to increased economic activity.  Tax revenues under Reagan increased from $517B in 1980 to $909B in 1988 with two huge tax cuts.  The reason the deficit also increased was due to increased spending, not decreased revenue.

https://www.thebalance.com/current-u-s-federal-government-tax-revenue-3305762

2015: http://www.crfb.org/blogs/houses-new-rule-dynamic-scoring

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Congress already adopted dynamic scoring for the CBO specifically so their trickle down reform efforts wouldn't look as nasty.

This kind of "reform" is not going to plug the massive revenue gaps.

[#gravelgang #lessiglad]

I disagree that this tax cut is "bad for the deficit."  The CBO will probably score this statically and portray it as a reduction in revenue, but the truth is that tax cuts increase revenue due to increased economic activity.  Tax revenues under Reagan increased from $517B in 1980 to $909B in 1988 with two huge tax cuts.  The reason the deficit also increased was due to increased spending, not decreased revenue.

https://www.thebalance.com/current-u-s-federal-government-tax-revenue-3305762

Cute, but no. We were in the middle of a nasty recession in 1980, and there were 8 years of elevated inflation in between those two tax receipts you listed. The total inflation from 1980 to 1988 was 44%. $517B to $909B is a 43% gain. So that's actually a loss of tax revenue in real terms. Not to mention Reagan ballooned the military budget.

Also, the 1986 tax bill was not a tax cut. It was revenue neutral by design.

The '86 bill should be the model, not the Bush cuts. There is evidence that revenue neutral tax plans spur economic growth, but that deficit spending tax cuts are neutral to negative, given higher estimated borrowing costs for businesses due to higher debt levels. But of course they're modeling this on the Bush cuts.

[Devout Centrist]

I disagree that this tax cut is "bad for the deficit."  The CBO will probably score this statically and portray it as a reduction in revenue, but the truth is that tax cuts increase revenue due to increased economic activity.  Tax revenues under Reagan increased from $517B in 1980 to $909B in 1988 with two huge tax cuts.  The reason the deficit also increased was due to increased spending, not decreased revenue.

https://www.thebalance.com/current-u-s-federal-government-tax-revenue-3305762

Can we please stop with the continued Laffer curve argument? For one thing, Laffer's hypothesis establishes no baseline for where revenue would begin to decrease from a tax cut. For such low individual tax rates, especially on solely income, it makes no sense to argue that these cuts will increase revenue.

Furthermore, showing an increase in tax revenue over an eight year period is highly irresponsible and does not account for more factors. Taking a look at this sole data point is the equivalent of looking at the Venezuelan GDP in current, not chained, dollars.

Even though revenue increased over those eight years, it's likely revenue would have been higher if the original tax code had been kept. In addition, President Reagan also enacted several tax increases over the course of his Presidency that probably raised revenue, too. This also ignores the economic and population growth over the course of eight years, a relatively long span of time in economics.

This is a very facile argument and I'd like to add, Laffer's curve has little application outside of heavy taxation or nations that have large underground markets. It simply makes no economic logic to argue that the United States, a country with one of the lowest tax burdens in the OECD, stands to gain revenue from this proposal.

[GeorgiaModerate]

I disagree that this tax cut is "bad for the deficit."  The CBO will probably score this statically and portray it as a reduction in revenue, but the truth is that tax cuts increase revenue due to increased economic activity.  Tax revenues under Reagan increased from $517B in 1980 to $909B in 1988 with two huge tax cuts.  The reason the deficit also increased was due to increased spending, not decreased revenue.

https://www.thebalance.com/current-u-s-federal-government-tax-revenue-3305762

There are studies to the contrary, i.e. indicating that tax cuts pay for themselves only partially.  For example (from http://www.crfb.org/blogs/do-tax-cuts-pay-themselves):

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Also, one argument for cutting the corporate tax is that the increased corporate profit would spur additional economic growth.  If this is true...why hasn't it happened yet?  Corporate profits have grown significantly in the last several decades, and tremendously since around 2000 (except during the Great Recession, of course).  See the chart at https://fred.stlouisfed.org/series/CP, which is from the St. Louis Federal Reserve Bank.