First, I do not do taxes for people. Period. This isn’t tax advice. It is social or political commentary about the new tax reform proposal.
Reform of the tax system in the US is a huge undertaking. It’s a complex system because it attempts to encourage certain behaviors like home (or two) ownership and charitable giving. And of course the necessary effort to stop tax cheaters has resulted in complications for the rest of us.
It is not my intent to do a full review of the proposed tax reform document which you can read here. Although lots of important details are still TBD, taxes really aren’t a focal point around here. However, I noticed one issue that I think is so important that I feel I need to talk about it.
The lowest tax rate is going up. Higher rates go down, but the rate paid by the poorest Americans will go up.
Currently, the lowest tax rates for individuals is 10%. That covers, for 2017, individuals who have a taxable income of $9,350 or lower. Your taxable income is your income less any standard or itemized deductions. Currently, it also subtracts your exemptions but those are slated to go away.
Now, I don’t do taxes for people. But I love spreadsheets and any kind of financial planning so when this proposal came out, I had to break out Excel right away. I was stunned by the results.
Let’s do an example to see what would happen to a single person who makes $19,750 a year. That isn’t much over the poverty level but it’s all you can make for gross income to stay at the 10% tax bracket now. I’m assuming this person takes the standard deduction and doesn’t have other exemptions.
Although his taxable income goes down under the proposal, the increased tax rate causes his tax bill to be only $5 lower. Not a massive tax cut for the working poor, I guess.
Let’s not forget that increasing a tax rate from 10% to 12% is a 20% increase in that rate. It’s also important to remember that money in the hands of the poor and middle class gets spent to boost the economy.
|Income||$ 19,750||$ 19,750|
|Federal Income Tax||$ 935||$ 930|
The proposal would decrease the upper rate which affects only those making well over $400,000 a year would drop from 39.5% to 35%. That’s a nice 11.4% decrease in rate.
What do I think of this tax proposal? I think the numbers say it all.