$1.5 Trillion GOP Tax Cut Thread

[jaichind]

Latest news is that under the GOP plan charities, mortgage interest and real estate taxes will stay as deductions but state and local income taxes will not.  401K deductions not clear.  The plan might raise the cap on how much one can contribute but lower the amount that one use to lower the taxable income.

[jaichind]

Latest news is that under the GOP plan charities, mortgage interest and real estate taxes will stay as deductions but state and local income taxes will not.  401K deductions not clear.  The plan might raise the cap on how much one can contribute but lower the amount that one use to lower the taxable income.

But that's literally lowering the cap... The whole point of 401(k)s are to lower one's taxable income. Putting money in after tax is just a Roth IRA.

Also, no SALT is probably a deal breaker for at least 15 GOP members, not to mention keeping property tax deduction while ditching the deduction for income taxes inserts the heavy hand of the federal government into local financing decisions, pushing localities to favor a property tax instead of an income tax, which as illinois can attest, can have catastrophic impacts on the finances of a state in the event of another housing bubble / collapse in values.

Agree with you on 401k.  What seems to be proposed is lowering the 401k limit and de facto expansion of Roth IRA limits.  In many ways this new system rewards those that can defer spending until later in their life since under Roth one gets taxes first then lets your investment growth increase tax free while 401k defers taxes allows one investment growth continue tax free but one withdraw the entire amount gets taxed.  Frankly I think we should have neither but if I had to pick one Roth is superior as it rewards savings versus bribing  someone up front to save.

[jaichind]

As much as I do not like the estate tax there is one problem with getting rid of it.  It is the issue of bureaucracy of the inheritor having to now keep track of the original cost of said asset.  Under the estate tax, the entire estate is taxed and then the capital gains cost is set to the value of the asset at the time of inheritance.  Now if we get rid of the estate tax then the inheritor has to keep track of the cost asset in question which could be decades ago in order to figure out what to pay in terms of capital gains.  In fact now this bureaucratic cost will be imposed on people who otherwise would not even have to worry about this as the estate they will inherit is below the estate tax threshold.

For me the real solution is to get rid of the estate tax and capital gains tax which would finally restore sanity and order to the situation.   If this is not possible I would still keep the estate tax around but lower the tax rate and increase the threshold.

[jaichind]

(Bloomberg) -- House Ways and Means Chairman Kevin Brady says he doesn’t plan to reduce the pretax contributions American workers can make to 401(k) retirement plans -- “unless there’s broad agreement” among investment advisers that a different system would lead workers to save more.
“It will either be strengthened or enlarged or left pretty much as is,” Brady told reporters Tuesday afternoon.

[jaichind]

House Ways and Means Chair Kevin Brady also indicated that SALT deductions will be gone except for real estate taxes. 

So it seems the plan at the broad level seems clear.  State and local income tax deductions are out and real estate tax deduction stays.  401K limits will not be touched.  Consolidation of tax rates to 10 25 35 with a possibility of 39.6 for taxable income above $1 million.

[jaichind]

Overall I support this tax plan

[jaichind]

I did a bunch of scenario analysis of 2018 tax year for a family of 3 at different income levels and different locations.  As expected the impact of the proposed tax changes differ greatly depending on lactation.

The impact people in the 30K-100K AGI range is pretty much the same in all regions which is a slight drop in taxes owed.

In high local tax tax areas (in sequence SF, NYC, NYC suburb (Scarsdale which is me), MD (Montgomery County where I spent my high school years)) the 100K-200K range has this plan as a tax cut of $2K-$3K.  Beyond 200K it becomes a slight tax increase but dips to a slight tax cut around 500K due to the affect of removing AMT.  Beyond 500K this turns in a massive tax increase as income areas with the worst going to the highest local tax areas.   For an AGI of 1000K in SF this plan becomes a tax increase of 25K and for MD 15K with NYC and NYC suburbs in between.  For an AGI of 2000K in SF this plan becomes a tax increase of 71K and for MD 41K with NYC and NYC suburbs in between.

For low local tax areas (FL and AL) this is a tax cut throughout with one peak savings at around 125K AGI with savings of around 3K.  The tax cut dips and peaks as a % of income again at AGI of 1000K where in FL the tax savings are at around 37K and 19K in AL before dipping.   In AL by AGI of 2000K the tax cut is falling quickly to 13K due to losing the state and local tax deduction.  In FL the tax cut continues to grow even at AGI 2000K because there are no state taxes to deduct under the existing system and PEASE continues to eat away at the deduction under current tax law which has less impact under the proposed tax system.

So net net, if you are high income in Blue state areas you will get a big tax increase.  If you live in FL and have high income you will get a big tax cut.

Under this new plan, if your household has an AGI of 2000K and live in SF the total tax (state tax, local tax,real estate tax, federal tax, Obamacare tax) will be 54.33% of your total income and that not adding in FICA or sales tax.

[jaichind]

I did a bunch of scenario analysis of 2018 tax year for a family of 3 at different income levels and different locations.  As expected the impact of the proposed tax changes differ greatly depending on lactation.

What does breastfeeding have to do with it?

More seriously, your analysis fails to take into account the tax breaks on pass-through income and how people will restructure their current revenue and expenses to take advantage of the changed tax code.

Ah. Sorry for typo.

Your feedback is true but I would argue that it will exaggerate the divergence between the different regions.  People with high incomes in metorpole (and high local taxes) areas tends to be employees and will not be able to take advantage of the lower rates of pass-through income.  The high income population in non-metropole (and ergo low local taxes) areas tend to be business owners who can restructure their income to take advantage of the this.   So the overall narrative is the same.  Small tax cuts for lower income population, wealth transfer from high income population in Blue states to high income population in Red states.

[jaichind]

It seems using chained CPI will be used right away instead of 2023.  This is a tax increase by proxy over time.   Something I support but it should be seen as a tax increase across the board.

[jaichind]

This bill is so f**king toxic and it is very clear the GOP is cynically going after the groups that didn't vote for them.  Lots of people will see a tax hike while corpoations and the super rich make out like bandits. 

This pile of bullsh**t needs to be killed with fire.

This is actually wrong, and maybe you should read the bill yourself and calculate how you come out before getting your piss so hot.

Even the NYT admitted in their winners and losers article that this bill will lower the tax bill of the vast majority of middle class families, while actually raising the tax bill of wealthier married couples with kids and who have large mortgages

Most Americans will be seeing their tax bill go down

He is somewhat right in the sense that this is, what I have characterized since the Spring, an anti-intelligentsia tax plan.  The high income population in metropole areas that are getting hit by this are knowledge intensive workers which mostly did not vote for Trump.  I am one of them was one of very few from that crowd that publicly voiced support for Trump in my social circles.  The high income population in non-metropole areas tends to be small business owners which as far as I can tell did mostly go Trump. 

Most of my friends and neighbors are getting killed under this plan but most of them voted Clinton anyway.  I actually come out barely ahead only due to some special circumstances but once you factor in the chain-CPI I am a small net loser over the next few years.  Still this plan makes sense as I think the federal government should not subsidize the high tax policies of Blue state governments.  If they want to raise taxes to fund single payer healthcare, go ahead, but not on the dine of Red State taxpayers.  I think what would make it better is if the mortgage and real estate tax deductions also were gone as well as the federal government should not show bias on how a state or local government choose to tax and fund itself. 

[jaichind]

I shouldn't have to remind you that those blue states are the ones that pay in more to the federal government.  The red states are actually subsidizing their low tax rates with our money.

Of course.  But the polices that lead to such distribution were create and still supported by the Blue State Democratic lawmakers.  This what is great about this tax proposal.  If and when it passes then the Blue state voters would start to ask themselves "why am I paying more in taxes only to help Bubba and Billy Bob down there in Alabama..." and as a result pressure those Blue state Dem lawmakers to curb these wealth redistribution programs or even better just vote GOP.   

[jaichind]

My dad lives in Portland ,has an upper middle class job ,and this tax plan would reduce my dad's taxes .

Well it depends on what is upper middle class job/income.  Lets do the math. 

We can define upper middle class income in OR as either AGI of 750K (that is the standard where I live in Scarsdale) or  500K or 250K.

If we go with 750K (of which around 37.5K are qualified dividends) then we can use state income tax of around 71.7K, real estate tax of around 15K (OR real estate taxes are around 1% so you figure 1% of $1.5 million dollar house) and charity of around 15K.  I assume no mortgage.  If we do that under current law in 2018 the fed tax would be around 199K.  If we go with the Trump plan even though the qualified dividends would be taxed at a lower 15% rate vs 20% under the current plan the loss of deductions means that the tax bill would be 209K which is an increase of 10K.

If we go with 500K (of which around 20K are qualified dividends) then we can use state income tax of around 47K, real estate tax of around 10K (OR real estate taxes are around 1% so you figure 1% of $1 million dollar house) and charity of around 7.5K.  If we do that under current law in 2018 the fed tax would be around 132K.  If we go with the Trump plan even the tax bill would be 125K which is a decrease of 7K.

If we go with 250K (of which around 7.5K are qualified dividends) then we can use state income tax of around 22.2K, real estate tax of around 5K (OR real estate taxes are around 1% so you figure 1% of 500K house) and charity of around 3.8K.  If we do that under current law in 2018 the fed tax would be around 46K.  If we go with the Trump plan even the tax bill would be 44K which is a slight decrease of 7K.

The main drivers here are at 500K AMT is kicking in strong which having AMT going away in the new plan help offset losing those deductions.  At 250K the new plan is almost wash relative to existing plan.   And at 750K the new plan is a clear loss.  Now, OR has fairly low real estate taxes ergo the impact on higher income taxpayers is smaller than other even higher tax states.  I agree OR is high state tax but you have compare that to places like NYC (where there is the city tax) or NYC suburbs where real estate taxes are high.  Same for CA.

[jaichind]

Upper middle class is 90k-250k

Ok. Well if that were the case then for sure I would agree that this tax plan does lower taxes for this group.  My point about wealth transfers were mostly for people in the 500K levels and above between metropole and non-metropole regions.

Of course if you ask people in my neighborhood they will define upper middle class at 750K but I get different regions have different views on this.

[jaichind]

One thing I missed is PEASE deduction reduction would be gone (since there are pretty much little deductions options left in the first place.)  If that were the case then the hit on Blue State high income population would be bad but slightly less bad then I first thought (for AGI 2000K in SF the hit would be something like 61K instead of 71K.)

[jaichind]

In low local tax states there seems to be a sweet spot of around AGI of 125K-150K where the tax cut is the largest in % of AGI terms.  This bunch seems to benefit from the low tax rates and higher standard deduction while under the present tax regime they do not benefit from itemization.   In high local tax states there seems to be a similar sweet spot of of AGI of around 500K where this bunch benefits from the new tax plan where as taxpayers in AGI regions somewhat below or above tends to pay more.  This has to do with the fact that AMT hits the hardest around this income range but now AMT now gone under this plan.

[jaichind]

https://www.google.com/amp/s/amp.businessinsider.com/gop-tax-reform-plan-bubble-rich-rates-trump-2017-11

Just found out about this bubble tax which has a de facto 45.6% marginal tax rate between 1 mil to 1.2 miles for singles and 1.2 mil to 1.4 mil for married couples.  I will get hit by this which will put me in the, if only slightly, loser camp.   The issue here is the GOP need more revenue but politically cannot raise the top 39.6 rate. So they came up with this.

[jaichind]

This plan is a plan that seems to encourage love and marriage.  It pretty much closes the marriage penalty for higher income earners.  It also disourages divorce by making alimony payments after tax versus the reciever of alimony pay tax. This has the de facto affect of being pro ex-wife vs the ex-husband since most of the time it is the man that pays alimony. The governments gets more revenue since the ex-husband is more likely than the ex-wife to be in a higher tax bracket which also means divorce is now more expensive. This is a policy social conservatives and NOW can both jointly back and the government gets more money.  Everyone is a winner except for the ex-husband. 

[jaichind]

It also discourages divorce by making alimony payments after tax versus the receiver of alimony pay tax.

If you really think alimony is a significant factor in whether to get a divorce, or even in the behavior that leads to alimony being granted, I pity you.

I am sorry if I come of making that claim.  I totally agree that causes of divorce, even if it is for financial reasons most likely have deeper causes elsewhere.  I am just stating that at the margins this plan does encourage marriage and discourage divorce.   The by-product of the marriage penalty at certain income ranges is the divorce premium where the total taxes paid by a couple goes down after a divorce and especially after the alimony gets taxed at the lower tax bracket of the alimony receiver.       

[jaichind]

It gives me every incentive to be reborn as a Rothschild or a Rockefeller. But what can you expect from a President who fits a Marxist stereotype of a capitalist pig?

Well, the reasonably wealthy will get a tax cut or tax increase depending on where they live and all things equal the gains made by low local income tax states are much less than the losses in high local income tax state. 

Of course we have this pass through entities "loophole."  But it is only for passive income that will be taxed at 25% and professionals that are actually earning money for labor (accountants, lawyers, financial professionals and other “consultants”) will still be taxed at ordinary income levels. There is a blended 30/70% split between capital/labor designation for people that can prove that they invested capital into a business.  The ability for the reasonably wealthy to take advantage of this are quite limited.   

I agree in theory the lower corporate tax rates will help equity owners which skew mainly toward the top but that is speculative and requires the UHNW taxpayer in question to risk their capital in the equity market to benefit from it.   Many UHNW investors might be heavy in fixed income where under this plan they take a slight hit instead of gains.  And there is no reason why any one middle class taxpayer cannot also take advantage of this by taking similar risks in the capital market instead of investing in CDs. 

[jaichind]

https://www.bloomberg.com/news/articles/2017-11-06/carried-interest-tax-break-may-be-changed-house-tax-chief-says

Carried Interest Tax Break May Be Changed, House Tax Chief Says

This idea would create a 2 year holding period to carried interest. 

[jaichind]

https://www.bloomberg.com/news/articles/2017-11-06/carried-interest-tax-break-may-be-changed-house-tax-chief-says

Carried Interest Tax Break May Be Changed, House Tax Chief Says

This idea would create a 2 year holding period to carried interest.  

This change in carried interest (as someone who actually works in a relevant industry), is comical window-dressing. It is very rare to take carried interest on assets held for less than two years, and it will just tweak the behavior of the small number of (mostly hedge) fund managers who do so. Presumably this change is primarily designed to allow them to make rosy assumptions about its fiscal impact and use that to cut (or restore deductions) elsewhere.

Totally agree with you.  I doubt this idea even on the surface will generate much revenue.  I think this is more about saying they kept Trump's campaign promise to get rid of carried interest "loophole".

[jaichind]

It seems like the Senate version will completely remove real estate tax as a deduction as opposed to the House version of 10K cap.  Good.  I do not see why the federal tax code should favor one form of how a state or local government collect  taxes (be it income, sales of real estate).  All of them should just go as deductions.  Of course if they do this my neighbors will cry louder.  Hopefully they get rid of this mortgage interest  deduction as well although I doubt it.

[jaichind]

Any chance swing-district Republicans get cold feet about this after yesterday's results?

I suspect it will have the opposite affect. 2018 most likely will be a bad year and all things equal I think it will make it more likely for the GOP to come up with something to motivate their base to come out to try to mitigate the damage.  The logic has to be by going so far their already pretty much offended the same people that will vote anti-GOP in 2018 by passing the tax plan changes.  So might as well go ahead.  By no means do it mean the GOP House and Senate can cobble a compromise that gets 218 GOP House votes and 50 GOP Senate votes.  But the 2017 election results all things equal makes that somewhat more likely in my view.

[jaichind]

I've been saying it for months now and now Chuck Schumer is hopping on board. Republicans killing SALT will accelerate the suburban move away from the Republican Party. The Virginia results offer sobering proof of that fact

I totally agree this would be the case for certain high tax high income suburbs.  But in most of those places the trend toward Dem has been going on for a couple of decades.  Most high income voters (the same bunch that now gets killed by SALT removal)  in my neighborhood were almost 100% anti-Trump anyway in 2016.  Also a lot would depend on who becomes the face of the Dems.  If it is clone of Clinton/Cuomo then this trend will continue but if it is Bernie Sanders then a lot of them will run back to GOP (despite Trump and this SALT removal proposal.)

[jaichind]

I've been saying it for months now and now Chuck Schumer is hopping on board. Republicans killing SALT will accelerate the suburban move away from the Republican Party. The Virginia results offer sobering proof of that fact

Yup the suburban curb-stomping is comin in hot. Look at suburban Philly, NoVA, Bergen, Long Island, Westchester, Chesterfield county, Henrico County, and Virginia Beach. This is just a preview of the carnage

Well in  Westchester Astorino  got 43.4% of the vote which is actually a bit more than what he got in  Westchester 2014 (41.6% of the vote) when he ran against Cuomo for governor.  The results in  Westchester seems par for the course given Obama is no longer in office.  Also the vote on the NY State Constitutional convention drove up turnout which also helped Dems.  My initial looking at the  Westchester results by township seems to show a reversion to a pre-2008 partisanship patterns which is of course bad for the GOP but does not seem to show that this SALT deduction removal is making a huge difference.