The most recent attempt at refining our tax system may look like a tax cut on the surface, but the devil is always in the details. On closer inspection, both the House and Senate tax proposals leave no taxpayer group unscathed — other than corporations, which have been the biggest beneficiaries of tax incentives since 1986.
One thing is certain in all these machinations: tax reform is a zero-sum game and someone will inevitably be left footing the bill.
Boosting the standard deduction looks like a benefit for most, but when coupled with the elimination of state and local tax (SALT) deductions and proposed changes to the mortgage interest, child-care and medical deductions, it would virtually preclude most people from itemizing their deductions. According to Pew Charitable Trusts, this could potentially increase itemizers’ tax liability an average of $28,173. (30 percent of all tax filers itemized their deductions in 2015.)
As proposed, it also looks like young families would bear a significant burden for these changes. Limiting mortgage interest to $500,000 makes any deduction meaningless to first-time homebuyers unless interest rates exceed five percent. From a back of the napkin calculation, a young married couple making $150,000 a year with a $500,000 mortgage would see an increase in their tax bill between $878 (House version) and $2,320 (Senate version). Couple that with the proposed elimination of interest on student-loan debt and young families would be getting squeezed.
The child-care credit is the one thing that young Americans supposedly gain. But it is paid for by eliminating exemptions. If you take away a $4,050 exemption in a 25-percent tax bracket and only give $600 to $650 more in tax credit s, the government just increased your taxes by $362 per child.
To make matters worse, the proposed bills would eliminate SALT deductions — the result of a bygone era of bipartisan compromise. SALT deductions have been a mainstay in the tax code since 1913, leveling out the inequity of a tax code that taxes income only on a national level, without any consideration for regional income and cost-of-living disparities. Face it, $500,000 can buy you a mansion in Kentucky, but in Washington, D.C., it can only get you a studio apartment (and that doesn’t include parking).
On the other hand, the wealthy would be fine . They can earn up to $1 million, keep their existing million – dollar mortgage deduction and their tax bill would go down by $34,120 in the House version and $45,088 in the Senate version — not to mention $1,650 per child from the child tax credit . If they a re one of the 1,800 people who stand to inherit more than $22 million, they are in even better shape.
It seems that the tax bills, as written, say that cities, young families and the elderly — not corporations or the wealthy — should pay to Make America Great Again. That sounds less like tax reform and more like a tax takeover.
Author of “ Take Back Your Money ” and “ The Ten Truths of Wealth Creation, ” John E. Girouard is president and CEO of Capital Asset Management Group, a registered principal of Cambridge Investment Research and an investment advisor representative of Capital Investment Advisors in Georgetown.