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GOP Tax Plan V

Fully parsing the Republican tax plan is going to take some time, since they only released it yesterday (they want it fully passed in two weeks, even though a lot of the details aren’t even written out yet). But a few things are very clear.

There is no doubt who overwhelmingly benefits, even if people are still trying to figure out by how much. The very rich make out like bandits, and people whose parents are billionaires will come out ahead of everyone else. Yup, Trump’s kids and a few thousand others like them are far and away the biggest individual beneficiaries, some of them coming out over $1 billion ahead. Each. As individuals. Self-made ultra-rich get huge annual payouts too.

Who comes out worse off is harder to figure out. Ostensibly everyone gets a tax cut, even if for most people it is peanuts. But as people run their own situations through the proposed new rules, it is clear that there are quite a few clusters of people whose taxes will be higher, or even a lot higher. Who are they?

The worst hit are middle income families with substantial medical expenses. Right now they can reduce their tax burden by reducing their taxable income by the amount of the expenses (minus the first 7.5%). In the new system they have to pay tax on all their income and still pay the medical expenses. This group will see tax increases from 1% to several thousand %, depending on circumstances. And there is literally nothing they can do to avoid it. (Don’t be sick is not helpful advice).

Another group that will be paying more will be those who own houses in high-cost, high tax states (NY, IL, CA, MA, etc.). With the mortgage interest deduction and state and local tax deduction gone, they will pay more. And the further up the middle income ladder they are, the more their taxes will go up. The hit won’t be as bad due to lower overall tax brackets and a few last-minute changes, but there are still many who will see an increase. Those hit by an increase you can tell to move to Kansas, which is at least theoretically possible, but probably not helpful advice.

People with very large student loan balances will also see a tax increase. This will hit recent graduates with decent jobs the hardest, since they earn enough for the student loan interest deduction to be worth something. And a lot of these live in high-tax states with high housing costs, and will be hit on that as well.

People with more 2 or more kids. The reduction of the child tax credit (which is phased out entirely in 5 years) will raise taxes more than any reduction caused by doubling the standard deduction. People who itemize will be hit immediately, since a larger standard deduction won’t help. So much for supporting working families.

Financially Independent College Students – scholarships and tuition reduction will become taxable. This hits graduate students who file their own taxes, since in many cases it will double their taxable income without changing their cash income. In some cases this is a 50%-400% tax increase.

House Flippers, since you now need to live in a house for five years (up from two) in order to keep the first $250k ($500k for married couples) of profit on the sale tax free.

And finally there is the big picture. Just because your own tax bill doesn’t go up does not mean that you are not affected but the changes. The tax code is a market-changing regulation. It incentivizes certain behaviors and dis-incentivizes other behaviors. This shifts markets and makes winners and losers. In fact, this is the whole reason the tax code is complicated, since most of the deductions were put there to incentivize some social good or other (whether the law of unintended consequences totally undermined the original intent is a separate issue).

The changes to the deductibility of mortgage interest will put downward pressure on housing prices, especially in high-cost areas. It instantly changes the affordability calculation, shrinking the pool of buyers. In some markets like Southern California it shrinks the pool of native buyers without changing the foreign demand, meaning that an even larger share of the regional housing stock will become second homes to rich foreigners, rather than lowering housing prices. In other markets it will bring down prices (or at least limit future increases). Whether this is good or not is a separate question. Who is harmed are existing homeowners, who will see less of a return on their asset. And these are middle class families. Luxury homes tend to be cash purchases, and are not affected.

Another second-order impact to the average taxpayer are program cuts. When the government has high debt and substantially less revenue, then existing programs will face future cuts. And that is simple math. The same party that is pushing hard for this massive giveaway has also until very recently talked about the necessity of cutting Social Security and Medicare. And that was before they blew an enormous hole in the deficit. These are programs that benefit wide swaths of the population, and the will have to be cut once the impact of these tax giveaways becomes clear.

Finally there is the next recession. Under normal circumstances, when the economy is good and the debt is high, you raise taxes (because the economy can handle it) in order to pay down debt. Then when the economy tanks you borrow to stimulate the economy. This is the classical Keynesian model for government stewardship of the economy (and it has nothing to do with neo-liberalism, which is about tilting the playing field through regulation). But you can’t prop up the economy with borrowing if your credit is maxed out. Which is why it is important to pay down debt when you can. Like now, when the economy is doing well (especially for big earners and corporations). But instead, for the past two cycles Republicans have cut taxes when the economy is good, and then bemoaned the increase in debt when the downturn comes. This is dishonest, and sets the country up for a real economic shock when the next downturn arrives (for the last 200 years there has been at least one major downturn per decade).

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