Will You Get a Tax Cut?

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Last Thursday the Republicans released their plan for tax reform. It included a number of changes to the income tax, a reduction in corporate taxes, and the elimination of the inheritance tax. Predictably, the Democrats and progressive media have spent the last week lamenting the tax cuts for the evil rich bastards (ERBs) while completely ignoring the effect it will have on anyone else. It doesn’t matter what happens to you – if any rich person saves $1 then tax cuts are evil and will bankrupt the country!

But hey, you might actually care how this is going to affect you … right? Will the GOP plan force you to pay more, which would suck, or might you suffer a little less theft of your hard earned money? You might not care but I sure as hell do, so I looked into the details and did some analysis.

According to the Dems only the rich will get a cut. Democratic 2020 Presidential hopeful Kamala Harris tweeted this: “On average, middle class families earning less than $86,000 would see a tax increase under the Republican “tax reform” plan.”

Holy fiat currency! I guess your taxes are going up!

Not so fast … like most progressives Harris has trouble with math more complex then 2 + 2. But don’t take my word for it. The Washington Post says she’s full of crap.

Unfortunately WaPo doesn’t do any further analysis to let you know what might happen to you, so I had to do it.

Guess what? You’re probably going to get a tax cut.

I’m not talking about the inheritance tax, which hardly anyone pays, or the corporate tax that you probably won’t even notice. I’m talking about the tax that directly affects you – the income tax.

I examined four scenarios that simulate the taxes of four families from different parts of the income spectrum. The scenarios compare what their taxes would be under the current law versus the Republican proposal (the actual bill can be found here Tax-Reform-Bill).

Here are the results:

Let’s start with Bobbie Sue and Billy Joe (you might recognize them from the Steve Miller song). After Bobbie Sue got out of prison (they didn’t get away like the song says) she hooked up with Billy Joe one last time and begat her son Bobby Joe. Mother and son now live in a trailer down in Texas and mom works at the local Walmart making $22,800 a year. By the way, Bobbie Sue’s income puts her at the top of the bottom 20% of all household incomes.

Under current law Bobbie Sue doesn’t owe any income taxes. In fact, she and Bobby Joe qualify for the refundable (subsidy) earned income and child tax credits. That means the rest of us will pay her $3,662 when she files. She’s not an income tax payer. She’s an income tax payee!

The proposed plan gets rid of the child tax credit and replaces it with the family tax credit. This new tax credit is $1,600 for children compared to the old $1,000 credit, and $1,000 of the new credit is refundable. In Bobbie Sue’s case, the first $600 of the family credit eliminates the income tax she owes, and the refundable $1,000 boosts the amount she gets from us by $535. In other words, Bobbie Sue will now get $4,197. She will be 14.6% better off under the new plan than the old.

So it looks like folks at the lower end of the income scale come out ahead under the GOP’s tax reform.

Once Billie Joe got out of prison he got a job as a heavy equipment operator. (By the way, he does help raise Bobby Joe. He’s not a complete jerk.) He’s still single and lives a simple life that is easily funded by his $43,511 salary. His pay puts him at the 40% level of all household incomes.

Billie Joe is the proverbial taxpayer who could do his taxes on a 3×5 card. His income is straightforward and his only deductions are the standard deduction and his personal exemption. Under the current law he will owe $4,500.

Under the proposed law, Billy Joe loses his personal exemption of $4,050. But his Standard deduction of $6,350 almost doubles to $12,000. This lowers the amount of his income that is taxable and he is no longer subject to the 15% rate that previously took so much, so he owes less tax. Then his adult family tax credit takes an additional $300 off the tax. In the end he only owes $3,481. His tax is cut by 22.6%.

It looks like lower middle class workers like Billy Joe will benefit from tax reform.

If you recall, Billy Mack is the detective who wouldn’t let Billie Joe and Bobby Sue escape justice. He still works as a deputy sheriff in the small Texas town where he lives with his wife and two kids. For this he gets paid $72,001, a salary that places his family right at the 60% level of all households.

Like Billy Joe, his taxes are pretty simple and under current law he will owe $3,533.

The new law would deprive Billy Mack of $16,200 worth of deductions from the elimination of personal exemptions. But, it almost doubles the standard deduction to $24,000. It also cuts his top tax rate to 12% from 15%. But most importantly, the new $3,800 family tax credit will hack $1,800 from the tax Billy owes compared to current law. In the end, his tax bill falls to $1,960. That is a whopping 44.5% reduction!

This solid middle class family comes out way ahead under the proposed changes. Do you think Kamala Harris ever bothers to verify her alternative facts?

You may also recall that Billy Joe shot a man while robbing his castle. That man was Beauregard T. Buttpucker III. Actually, Billy Joe missed and Beau merely peed in his pants. He recovered from this indignity and went back to his job as a VP of the bank his family owns. Beau is worth millions but his wealth is tied up in the family corporation that owns the 2,000 acre ranch he and his 4 siblings (and their families) live on. Thus his wealth is barely reflected in his annual income of $250,000. Beau’s not in the top 1% but he is close – the top 5%.

Beau is married with no kids and his investment income is all short term so it gets treated as regular income. His home has been in the family for generations so he doesn’t have a mortgage and his other potential deductions don’t pass the standard deduction threshold. Therefore his taxes are simple.

Under current law his income tax totals $51,060. Note this is over 11 times more than any of our other taxpayers. In fact it is infinitely more than Bobbie Sue’s taxes.

With the proposed changes Beauregard, like everyone else, will get a tax cut. In absolute terms he gets the biggest cut – $6,860. But he’ll still be paying $44,200. That means Beau is now paying over 12 times more than anyone else.

The Democrats are right. The ERBs will get the biggest tax cuts. Of course they will. They pay most of the taxes. If a rich dude pays $50,000 in taxes under the old law but saves $5,000 because of the new law then he has only gotten a 10% cut. Compare this to a middle class taxpayer who formerly paid $4,000 but now only owes $2,000. “Hey that’s only a $2,000 cut. That isn’t fair – the evil rich bastard got a $5,000 cut”, shrilly scream the Democrats. True, but the middle class payer got a 50% cut compared to the ERB’s 10%. How is that fair?

You can manipulate the numbers to say anything you want but unless you are willing to tell the whole story then you aren’t telling the truth. The fact is, Trump is right (this rarely happens so don’t get used to it) and the Democrats are full of shit. Most people will be better off under the proposed tax law. And the ERBs will still be paying a portion of the taxes that is far greater than their share of the national income.

So to quickly review, here is the tax owed by our four taxpayers:
………………………………………………Current Law……..Proposed Law
Bobbie Sue                                     -$3,662                -$4,197
Billy Joe                                           $4,500                  $3,481
Billy Mack                                       $3,533                  $1,960
Beauregard T. Buttpucker III      $51,060                $44,200

(If anyone would like to check my calculations here is the spreadsheet.)

I freely admit that this is a simplistic analysis. It is also the only one I’ve seen done by anyone. But because it is simple it relies on the most basic parts of the tax code and thus explains most of the effect that any taxpayer will notice. The Republican plan will get rid of a lot of deductions and reduce the effect of a few that are kept, but the majority of us don’t take these deductions anyway. If you live in New York, have a big mortgage on your house, and plan to buy a Tesla then your taxes WILL go up. Sucks to be you. But the rest of us will be robbed a little less.

And if you’re saving on your taxes then why do you even care what happens to the rich?

One more thing … taxation is still theft!

Wayne Middlesteadt is the author of Five Ways to Beat the Market and The Golden Age of Distance Running.

About Author

Wayne Middlesteadt

Wayne Middlesteadt is a 1986 graduate of Georgia Tech and has an MBA from Georgia State University. Currently working as a financial writer and track and field historian, his latest book is Five Ways To Beat The Market.