We haven’t seen any sign in Donald Trump’s still-incomplete tax plan of Hillary Clinton’s really good idea of a standard deduction for small businesses. But we have heard that Trump wants to nearly double the standard deduction for individual taxpayers. I thought that plank sounded like a great idea, until I read that the Kristi Noem-endorsed Republican tax proposal calls for eliminating the personal exemption:
Under existing tax law, a married couple with two children can combine the $12,700 standard deduction and $16,200 in personal and dependent exemptions to shield $28,900 from federal income tax. Under the Republican plan, that same couple would be able to shield just $24,000.
“Increasing the standard deduction and losing the personal exemption is a trade-off that might work for single filers with no kids,” said Howard Gleckman, a senior fellow at the nonpartisan Tax Policy Center. “It doesn’t work at all for a single filer with two kids. They’d be worse off” [Jim Puzzanghera, “Why the GOP Tax Plan’s Big Boost in the Standard Deduction Won’t Be a Winner for Some Average Americans,” Los Angeles Times, 2017.09.28].
Again, Kristi Noem, aren’t we supposed to be focusing on average Americans?
Next year, under current law, the three Heidelbergers in my average household get to keep $24,850 tax-free, $12,700 from standard deduction, $12,150 from three personal exemptions. Pass the Trump plan, Kristi, and you drop our tax-free total to $24,000, subjecting $850 more to federal income tax.
How much more we’ll pay on that $850 depends on what bracket we reach this year. But under current law, we’ll pay 10% on the first $18,650 of our taxable income. If Noem votes for the Trump plan, we’ll pay at least $85 on the extra money Kristi and Donald would tax.
But the Noem/Trump tax plan would raise everybody’s lowest tax rate from 10% to 12%. So suppose our taxable income last year was $15,000. Under Noem/Trump, our taxable income goes up to $15,850, and we pay 12% instead of 10% on that money. Noem/Trump would thus raise our 1040 Line 44 tax from $1,500 to $1,902.
Luckily, Noem/Trump also raises the child tax credit from $1,000 to $1,500. That change would drop our Line 56 tax by $500, back to $1,402. The additional tax burden from the loss of each personal exemption and the higher 12% bottom bracket tax rate is roughly equal to the extra $500 credit for each child, so families with more kids than we have but similar income will see a similar net tax cut of around $100.
But Noem/Trump sneaks a long-term drag on the little guy by changing how the IRS indexes tax rates and brackets. The tax proposal adopts a different, slower-growing measure of inflation. The Tax Policy Center assumes that change will make the standard deduction, the tax bracket boundaries, and other indexed items grow 0.25 percentage points more slowly each year, meaning credits decline in value and more income will end up being taxed in higher brackets compared to current law. Just the slower growth of the standard deduction means that within ten years, Noem/Trump will be taking back $50 of the $100 tax break they might be giving me.
And while they give my family $100 to $50 more each year (and I’m not banking on that money until Noem and Trump finally write down their full plan), they are giving folks in the top 20% an average cut 139 times larger than that. Plus, while my tax cut goes down over the next decade, the average tax cut for the top 20% doubles by 2027.
I’ll be happy to get any dribble of the Noem/Trump gravy… but remember: you, me, and the rest of the bottom 40% of taxpayers get only 5.2% of that gravy, while to the top 20% of taxpayers get 74.5%.