Trump’s tax plan would shaft 11 million taxpayers

Rick Newman
Columnist

Cathy Schneider ran the numbers, and wasn’t happy with the outcome.

Under the Republican tax cut proposals circulating in Congress, Schneider’s 95-year-old mom in Barrington, Rhode Island, would pay $600 to $800 more in annual taxes, Schneider calculates. She’d lose much or all of the state and local tax deduction that currently helps to lower her tax bill. Losing the personal exemption would hurt, too. Since her mom lives on a fixed income, she wouldn’t benefit from the wage gains Republicans promise will arise from their tax cut proposals. Her gross income wouldn’t go up, but her taxable income would, and she might even end up in a higher tax bracket.

“I don’t think tax reform, per se, is a bad thing,” says Schneider, a retired economics professor in Newton, Mass. “Whenever there’s tax reform, there are winners and losers. But what I find beyond annoying is the blatant disregard for who the losers are.”

President Donald Trump promised major tax cuts as a candidate last year, and the Republican-controlled Congress is now poised to deliver. The House has already passed a large tax-cut bill, and Senate leaders say they hope to pass their own bill soon. The two chambers may speed up the usual negotiating process for melding House and Senate bills into a single piece of legislation, so Congress could end up passing sweeping tax cuts by late 2017 or early 2018.

It’s fairly clear what the final bill is likely to look like. Tax cuts would total roughly $1.5 trillion over 10 years, or $150 billion per year, on average. About 75% of the savings would go to businesses, thanks to a reduction of the corporate rate to 20% from 35%, and other changes. Individuals would enjoy the other 25%, with large tax cuts for the wealthy and less accruing to the middle class.

Total number of taxpayers facing higher taxes

The Senate tax-cut legislation, which is slightly more generous than the House bill, would cut taxes by an average of $1,300 per taxpayer in 2019, according to the Tax Policy Center. But that average masks the fact that some people would see much bigger tax cuts, while a smaller percentage would actually face a tax increase. Taxes would rise for about 9% of taxpayers, including some with modest incomes — such as Schneider’s mom, who earns less than $40,000 per year from Social Security, a pension and a life-insurance annuity.

The House bill would generate an average savings of $1,200 per taxpayer, according to the Tax Policy Center. But it would raise taxes on 7% of filers. Americans file about 140 million tax returns each year, so if you split the difference between the House and Senate legislation, and assume 8% of filers would pay more, that adds up to about 11 million filers whose taxes would go up. The number of individuals affected would be higher, because 11 million filers counts married couples filing jointly as a single taxpaying unit with a single return.

Extrapolating a bit further, 48% of all tax returns are married couples filing jointly. So, if the same proportion applied to the 11 million filers whose taxes would go up, then more than 16 million individual Americans would face a higher tax bill under the GOP tax cuts.

Is 16 million a lot of people? In political terms, yes. Consider the Affordable Care Act, the 2010 law that made some people worse off in order to make more people better off. Obamacare, as the ACA is known, extended health insurance coverage to around 20 million additional people, which is good. But it also made insurance more expensive for some people who don’t qualify for ACA subsidies or have coverage from an employer. Some people buying insurance on the so-called individual market saw premiums skyrocket because insurers had to offer more coverage under the ACA, which cost more, and also because higher premiums for individuals helped offset other new costs.

The number of people who might qualify as “losers” under Obamacare numbered fewer than 5 million. But media attention and a slew of horror stories about people whose premiums suddenly soared helped tilt public opinion against the ACA. The problem still exists, one of the reasons public support for the ACA remains weak, at best.

Will the tax cuts lead to public backlash?

There are more losers under the proposed GOP tax cuts than there were under Obamacare. It’s too early to tell if this will generate a public backlash, but early signs suggest it could. Polls show that more than half of Americans disapprove of the GOP tax cuts, while only around one-quarter approve. So, attitudes are 2-to-1 against the cuts. The main objection is that the cuts favor businesses and the wealthy too much, and the middle class too little. That perception is pretty accurate, since middle-class taxpayers might save just $500 per year or so under the plan, according to Moody’s Analytics. The shareholder class, however, would probably win big.

Republicans aren’t stupid, and they might be banking on the likelihood that most of the tax-plan losers live in Democratic states — such as high-income, high-tax coastal states including New York, New Jersey, California, and yes, Rhode Island. So, if voters in those states go to the polls in 2018 or 2020 aiming to punish Republicans, it might not matter.

Not so fast. One of the biggest changes pushing some people’s taxes up would be the reduction or elimination of the tax break for state and local taxes, known as the SALT provision. While that tax break does affect blue states more than red ones, a Yahoo Finance analysis shows that it’s also popular in swing states that will help determine which party controls the government in the 2018 and 2020 elections. The percentage of taxpayers claiming the SALT deduction is 35% in Virginia, for example, 29% in Colorado, 26% in Iowa and North Carolina, 25% in Pennsylvania and 24% in ever-important Ohio.

How many tax-cut losers can Republicans afford to create in those states? Not too many. They might want to do the math.

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Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman