Economy · Taxes

TAX DAY AND TAX CUTS

TToday is Tax Day and everyone that has not filed is rushing to get their returns done.  I have been in that category in the past where you are lined up at the Post Office to ensure you get the correct post mark on your return.  For the past several years I have taken advantage of having multiple CPAs among my children and their spouses, so my taxes are done early and I have already received my refund.  

I have read all the media reports saying the tax bill favored the wealthy and they use a slight of hand trick to make their point.  They take hypothetical tax payers and estimate what the tax bill will have saved them in taxes.  They quickly point out that Taxpayer A got a tax cut of $15,000 and Taxpayer B only got a tax cut of $350.  Here is what they don’t tell you.  They don’t say how much Taxpayer A and Taxpayer B actually paid in taxes.  If you are in a higher income bracket and receive a percentage cut, then your raw dollars will be higher than someone paying far less in total taxes.

Then we have the stories about people complaining that their refunds are not what they are used to being so obviously the tax bill did not work for them.  What they don’t realize is that the IRS changed the withholding rates after the tax bill was enacted.  What they need to do is look at their actual taxes and see how much they paid and get their effective rate, the only one that matters.  My daughter is a CPA and she gets tired of hearing people say their refund was less, so the bill did not work.  To her it is like you go to a store and buy a pack of gum and give the clerk a $10 bill.  He gives you your change.  The next day you go to the same store, buy the same gum and give him a $5 bill.  When you get your change, you ask him why it is less than you got the day before.

Politically the Democrats have been selling the idea that only the wealthy got a tax cut and the middle class actually paid more in taxes.  They know this is false, but they spread this rumor anyway because it fits their political narrative.    I would think that most people believe the New York Times leans more to the left politically and they have also published stories about this mythical bonanza to wealthy people at the expense of the middle class and poor.  But recently the New York times has to finally fess up that perhaps this was a myth and everyone actually did get a tax break.  This from an article in the NYT on April 14 of this week.

Here are some excerpts:

  • “Experts are divided on whether the tax law was a good idea. But there is little disagreement on this core point: Most people got a tax cut.”
  • “To a large degree, the gap between perception and reality on the tax cuts appears to flow from a sustained — and misleading — effort by liberal opponents of the law to brand it as a broad middle-class tax increase.”
  • “The Joint Committee on Taxation — Congress’s nonpartisan team of tax analysts — found that every income group would see a tax cut on average. So did the Institute on Taxation and Economic Policy, a left-leaning think tank that was sharply critical of the law. In fact, that group went even further: In a December 2017 analysis, it found that every income group in every state would pay less on average under the law in 2019.
  • “The vast majority of people did get a tax cut,” said Nathan Rigney, an analyst at H&R Block’s Tax Institute. That’s been clear all along, he added, “just now we have real data to back that up.”

I was especially amused at how the NYT article talked about the limitation on the State And Local Tax cap of a $10,000 deduction.  Chuck Schumer, Richard Durbin and Kamala Harris were outraged.  These are the same people that say the wealthy should pay more taxes, but I guess they meant someone else’s wealthy people should pay more and not their wealthy constituents.  This whole debate was accurately summarized in the NYT article.  I give you their paragraphs because I could not have explained it any better.

One of the most discussed provisions of the tax law was its $10,000 cap on deductions for state and local taxes, the so-called SALT deduction. The cap drew loud protests from politicians in high-cost, high-tax states — and Democratic strongholds — like New York, New Jersey and California.

The SALT cap definitely had a bigger effect in those states. But that doesn’t mean most of their residents saw a tax increase.

For one thing, the two-thirds of Americans who took the standard deduction in previous years weren’t taking the SALT deduction, or any other itemized deduction. And most households earning less than $75,000 — as about two-thirds of households in New York State do — were comfortably under the $10,000 cap.

Paradoxically, many higher-income households weren’t getting the SALT deduction, either. That’s because the alternative minimum tax effectively wiped out many deductions, including SALT, for couples earning more than about $250,000 a year. The tax law significantly defanged the A.M.T., meaning most of those households ended up getting a bit of a tax cut.

The SALT cap did hurt families who earned enough to pay a lot of state and local tax but not enough to be affected by the A.M.T. (Other factors, like how people earned their money, also make a difference.) A Treasury Department audit estimated that 11 million taxpayers fell into that category.

But just because people were bitten by the SALT cap doesn’t mean they were net losers under the law. The law doubled the child tax credit, for example, and made it available to more taxpayers. It also cut marginal tax rates and changed the treatment of some business income.

“A lot of people who are very angry about the SALT were not thinking about it in the context of the stuff that actually benefited them,” Mr. Gleckman said. 

“You can construct specific examples of situations” where people paid more, he added, “but they are very specific and over all pretty unusual.”

That was a very concise and clear description of how the loss of the SALT deduction actually was applied and how it affected on a very few people and they were normally high earners, the people Democrats normally complain are not paying enough.

What the tax bill did was stimulate the economy and give tax incentives for small businesses to expand and grow.  There are the businesses that hire more people.  These are the businesses that are the engine of the economy.  

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