How to Get Your Tax Weekend Back
This weekend millions of Americans and/or their accountants are
preparing to file income tax returns. Tax day is an annual event as significant
as the Fourth of July – though far less fun.
Photo: Getty Images
My friends outside the US – and I have many – observe our ordeal
with a combination of amusement and pity. They don’t like taxes either, and
often pay far more than we do. But their governments, for the most part, don’t
put people through such torture every year. They appear to have found better
ways. Why can’t we?
Today we’re going to look at who wins and who loses under the new
tax law. I think many of you will be surprised.
.
The bottom 50% earn 11.3% of the adjusted gross income and pay
2.8% of the income taxes. The top 50% have 88.7% of the AGI and pay 97.2% of
the taxes. That’s why we call the system “progressive.” By design, it gives
those at the bottom a lower rate.
In fact, it favors more than just that bottom half. As the chart
shows, everyone except the top 5% pays a lower share of the total income taxes
than their share of total income. That’s not necessarily true of every taxpayer, since these
are averages, but it’s certainly true for most. The top 1%, which we are often
told gets wildly favorable treatment, doesn’t look so lucky by this measure. It
only received 20.65% of the income but paid almost 40% of the taxes.
Let me point out again, this tax structure is not an accident. The
tax system is designed
to produce this result. The public wants the wealthiest Americans to pay a
higher percentage of their income, and they do. Provisions that reduce taxes
for the middle and lower classes mean those in the top brackets pay more.
Some caveats on this data: It omits payroll taxes, which for those
on the lower end are often higher than the income tax. Wealthier people also
have more ability to shift income into favorable categories. But in the
aggregate, they still pay higher rates on more income than majority of the
population does. We have a highly progressive income tax system by any fair
definition. The share of tax paid by the top 20% of Americans also changes when
social-insurance levies are included. It drops to about 67% of total federal
income taxes paid from roughly 87%. (WSJ)
Changes in the recent tax bill will make the system even more
progressive starting this year. You would never know that if you read the
media, which seems to think that the tax bill was a panacea for the rich.
Wealthy people in high-tax states will certainly have to pay more. But that’s
the responsibility of those state governments, some of which seem intent on
driving out their best revenue sources.
Laura Saunders, writing for the Wall
Street Journal, uses analysis from the nonpartisan Tax Policy
Center to demonstrate that the very top earners will now pay an even higher
percentage of overall taxes. The top 1% go from paying 38% of total income
taxes to a little over 43%.
According to Saunders,
The results show how steeply progressive the U.S. income tax
remains. For 2018, households in the top 20% will have income of about $150,000
or more and 52% of total income, about the same as in 2017. But they will pay
about 87% of income taxes, up from about 84% last year.
By contrast, the lower 60% of households, who have income up to
about $86,000, receive about 27% of income. As a group, this
tier will pay no net federal income tax in 2018 vs. 2% of it last
year.
After the income tax, the most important revenue raisers are
for social insurance, such as Social Security and Medicare. They will
provide about 34% of the total tax take this year, according to the Joint
Committee on Taxation. Corporate taxes will account for 7% of revenue,
down from 9% in 2017. The rest of the total comes from excise taxes, estate and
gift taxes, and other sources such as customs duties.
Roughly one million households in the top 1% will pay for 43% of
income tax, up from 38% in 2017. These filers earn above about $730,000.
According to Roberton Williams, an income-tax specialist with the
Tax Policy Center, the share of taxes paid by the top 5%
will rise despite the fact that people in it were the largest
beneficiaries of the overhaul’s tax cut, both in dollars and
percentages.
Why are income taxes negative for the 77 million households in the
bottom two tiers, which earn 13% of income? In recent decades Congress has
chosen to funnel benefits for lower earners through the income tax rather than
other channels such as federal programs. Some of these, such as the
earned-income tax credit for the low-income workers, make cash payments to
filers who don’t owe income tax.
The tax overhaul further lowered the share of income tax for people
in these tiers, in part because it nearly doubled the standard deduction and
expanded the tax credit for children under the age of 17.
People in the lower tiers do owe other federal taxes, such as for
Social Security and Medicare. If these tax payments are included, their share
of federal taxes paid turns positive.
In order to pay for the tax cuts on corporations and the lower
income tiers of the country, the Republican Congress had to scramble to find
additional sources of revenue in order for the new tax plan not to increase the
deficit more than it did. And they found some of that revenue by taking away
deductions. There are literally scores of smaller deductions that you were
previously able to itemize that will not be available in 2018, or 2019 at the
latest. Let’s look at just some of the bigger ones.
1. Everybody knows that state and local income taxes
(SALT) will no longer be completely deductible. You will be allowed to deduct
only up to $10,000. That is especially painful for people living in states with
high income taxes and/or property taxes. And while Texas and other low-tax
states don’t have an income tax, local governments are financed by property
taxes that are typically higher than those of a lot of states. There are just
six states that don’t have an income tax. The darker blue your state is in the
following chart, the higher your total state income taxes are and the more pain
you will feel.
2. Starting in 2018, homeowners can take a mortgage
interest deduction on a loan of up to $750,000, down from the current limit of
$1 million. When the median
home in California is $480,000, a lot of homeowners are going to have mortgages
in excess of $750,000.
3. I am not certain what Congress was thinking, but
they took away the deduction for personal disaster losses. Now you can take
deductions on personal losses if those losses amount to more than 10% of your
income. In the future, you can deduct those losses only if the president
declares their cause a national disaster. So you would more than likely be able
to deduct losses from a hurricane or earthquake, but if your home were
destroyed in a flood not associated with a larger disaster, you would not be
able to take a deduction for your loss. The same thing goes for a fire. Or for
vandalism. This provision makes me wants to throw the yellow flag for piling
pain on top of more pain.
4. Today, if you move more than 50 miles for a new
job, you can deduct reasonable moving costs. Starting this year you can’t.
5. Divorces are never fun or easy. They tend to cost a
lot of money, on top of the emotional toll they take. Under current law,
alimony is deductible by the former spouse making payments and is included as
income to the recipient. In the new bill, however, these payments are no longer
deductible by the payor. Nor are the payments included in the recipient’s gross
income. Instead, the person getting the alimony has to pay taxes at the rate
paid by the person paying the alimony. And since it’s usually the man who makes
more money and pays the alimony, the woman will get taxed at the man’s tax
rate. No matter what her actual income is. Ouch. This provision is effective
for divorce and separation agreements signed after Dec. 31, 2018. (CNBC)
6. A Bloomberg
article highlights the fact that business deductions for meals may be
going away. Yes, corporations get a reduced tax rate, but essentially, the new
law says that entertainment expenses are not deductible. Business lunches are
entertainment and not deductible.
Ah, I remember the days when you could deduct 100% of your meals
and entertainment. Yes, I know that during the Reagan years the top rate was
70%.
But no one paid that. There were so many loopholes and deductions that my
effective rate was much lower than it is today.
The problem is, there is a great deal of confusion over what might
count as a deductible expense. If an expense is considered entertainment, it is
not deductible. If you think that change is not going to make a difference in
the revenues of high-end restaurants, you’re not paying attention. I don’t
think the change affects Chipotle or McDonald’s much – they’re not exactly
business-meal destinations. There are always consequences to tax rules, but I
think some of the unintended consequences are going to be more painful than
people currently think. Corporate accountants are going to strictly limit the
ability of their employees to take their clients out to dinner.
7. The Republican Congress has spent a great deal of
its time patting itself on the back over the 20% tax break on pass-through tax
corporations. The thought was that they were helping small businesses to keep
even with the big players who got most of the corporate tax cuts.
Well, not so much. It turns out that a lot of us with pass-through
corporations don’t qualify, and if you are a modern business with lots of
contract labor instead of actual W-2 employees, you don’t qualify either. Why
do doctors not get a tax break but architects do? You would think a restaurant
owner would qualify. Not necessarily. If you advertise the best pie or steak in
your area, you may lose your tax exemption.
Seriously. Who writes these rules?
This cute infographic from Bloomberg illustrates part of the problem. No one
really knows who qualifies for what.
8. Lots of “little” things (unless of course they are
your deductions, and then they become big) are no longer deductible. Companies
have been able to subsidize commuting and parking expenses and deduct them. No
more. And that $20 a month subsidy you got for commuting to work on a bicycle
goes away.
You can no longer deduct your cost for preparing taxes under the
new tax plan, and if you do your own taxes, you can’t deduct the cost for the
software.
No more deductions for the commissions you pay your agent or your
manager or even for your union dues. Hollywood actors and professional athletes
are not going to be happy about that first part. If you’re an actor, you no
longer get to deduct your audition travel expenses or acting lessons, either.
And while the new tax law nearly doubles the standard deduction
for married couples and singles, up to $24,000 and $12,000 respectively, you do
lose your personal exemptions. Many families with multiple children will feel
that loss of exemptions keenly. I can tell you from personal experience that having
more than two kids is expensive. But then again, lower-income families get an
enhanced child tax credit.
And my personal pet peeve: You can’t buy sporting tickets and give
them to clients and claim them as a business expense. I don’t imagine that Mark
Cuban and Jerry Jones here in Dallas or any other professional team owner will
be happy. That change has got to leave a nasty mark on their corporate sales.
And it’s not just professional sports. I have a number of friends who are
college sports fanatics, and they had ways to make their ticket purchases a
charitable deduction or a business expense. And they loved to use the tickets
as a business perk. Now that’s gone, gone.
Some people were able to itemize their investment management and
consulting fees, tax-preparation fees, unreimbursed employee expenses, and
certain hobby expenses. Gone as well.
To be fair, there are a number of really good portions of this
bill. As noted above, the increase in the personal deductions will mean that
fewer people on the lower income scale will pay any taxes at all. Also, the
lifetime state tax exemption doubled to $11.2 million for individuals and $22
million for married couples.
And with that I’m going to stop talking about taxes, even though I
could easily write at least three or four times more than I have, and will
probably get back to some of the other details later. There are so many. But I
have a personal issue that I want to talk about. If you have high blood
pressure, you might want to skip this.
I am going to go in a different direction for a few paragraphs.
Personal privilege. This kind of, sort of comes under the heading of economics.
Almost any real economist understands that in order to grow an economy you have
to increase productivity and/or increase the number of workers. There is no
other magic bullet. If your society is not producing enough children, then you
need to be bringing in immigrants if you want to see GDP growth. And for a
country built on immigration, you would think we in the US would get that –
which is why I don’t understand the whole anti-immigration movement. Yes, we
need to control the process, and we need to figure out how to attract
better-educated and higher-income workers (as Canada is doing), as well as the
service workers who make the world go ’round; but we are not dealing with the
issues of immigration and illegal immigrants in a rational manner. This fact
was brought home to me in a very personal way this afternoon.
Warning: This is going to upset nearly every reader – but you will
be upset for different reasons. Some of you will more or less agree with me,
and some of you will think I’m dead wrong. But either way, we need to make some
decisions in this country.
This is a personal story. Mary has been working for me for 16
years, cleaning my house, moving me, and doing so many other things. She has
become family (as she has with all of her other clients). She’s been in the
country for at least 20 years. She is one of the most honest people I know,
often bringing me money that I have somehow put in the wrong pocket or drawer.
She came to the US a long time ago on a visa, physically lost her visa and her
passport, but stayed anyway and began to work. She is married to a US citizen
and has three children, the youngest of whom is 10. She pays her taxes like
every good citizen. She has been trying to firm up her immigration status for a
very long time, and a lawyer finally arranged for her to go back to Juarez to
deal with the consulate there, taking along papers from officials here who told
her she could simply apply, ask for “forgiveness,” then come back into the US
and get her US citizenship. It was supposed to be easy.
She found out today that she was turned down. And now she is stuck
in Juarez, not the safest of cities. Some bureaucrat at the consulate in Juarez
decided that her (US citizen) 10-year-old son doesn’t need his mother, that her
(US citizen) husband can live without his wife, and that this sweet, honest
taxpaying lady who has never been a problem to anybody in her life shouldn’t be
allowed back into the United States for at least a year. Maybe longer. And then
she can ask again. No guarantees.
This is America? The land of the free and the home of the brave?
Is that the business we are in, separating mothers from their young children?
And keeping out the very people we need?
I know that a number of people are upset about illegal
immigration. I totally agree that we need to get a handle on our immigration
rules. And our borders. But we need to recognize that there are families in
this country who have been here for decades, the Dreamers among them, who are
important contributors to our economy. If for some reason they all left, the
GDP of this country would simply collapse. I am talking a Great Depression
here. They make that much of a difference. And immigrants have made that much
of a difference to the US for the last 250 years. Maybe I’m a little bit more
sensitive to the situation here in Texas, but we are absolutely used to
Hispanics and immigrants of all flavors working, and we never ask if they are
illegal or not.
There are darned few US citizens who don’t have immigrants in
their family histories. But for whatever reason, each generation of immigrants
wanted to keep the next group that came out. They were literally trying to
build a wall in California in the 1870s to keep the Chinese out
I simply don’t get it. Trump rolled over on the DACA bill, giving
the Democrats hundreds of thousands more potential immigrants than they had
actually asked for. In doing so he angered a bunch of people in the Republican
caucus. And you would have thought the Democrats would be ecstatic. All Trump
asked for was a lousy $25 billion to build his wall, a cost that would have
been spread out over a number of years. Seems like a reasonable horse trade to
me.
Now, let me be clear. I think the wall is kind of silly. Will it
inconvenience people who are trying to enter the country illegally across our
southern border? Absolutely. Do I think that someone who really wants in will
not figure out another way? Not a chance. Think Cuba in the ’60s. But $25
billion to settle our most thorny immigration issues? Chump change.
A few years ago, in a small, intimate meeting, I really pushed
Texas Senator Ted Cruz, who was running for president and touting his
anti-immigration line. He knew who I was because we had met before, the first
time at his request. We have had long conversations, and honestly, whatever you
may think of him, the guy is remarkably brilliant. We have had our
disagreements. The host of the dinner put me next to him at the dinner table,
and Ted asked me to give him my best shots in the Q&A that would follow the
meal. I told him he didn’t want me to do that, but he said, “Bring it on.”
Well, I did.
After some of the difficult economic questions, which he did
pretty well with, I specifically brought up my maid. He gave me glib answers. I
was not in the mood to let him go on this one. Okay, I might be a little
passionate about it. Every time he tried to dodge the question, I came back and
asked, “Senator, do you want to deport my maid?” This went on for some time as
I kept interrupting him with this very firm question.
When he finally realized I wasn’t going to stop asking in front of
a group that he wanted to impress (and get a lot of money from), he said that
immigration policy should involve a three-step process. First we should get a
handle on who is coming in and control our borders. I totally agree. Second, we
should reform the immigration process so that we get more people who are
beneficial to the US. I absolutely agree. And then, he said, when those two
things are done, “I believe the American people will do the right thing about
the illegal immigrants in this country.” Which was basically his admitting that
no, he really did not want to deport my maid or any of the other multiple
millions of people who are contributing to American society. It was the correct
answer, but you basically had to beat him up to get to it, because the issue is
so contentious that many of Ted’s constituents around the country just want to
say, “Send them back!” By the way, that is not the attitude of his Texas
constituency. But you need more than Texas to be elected president.
What is it about the American political world today that we can’t
have rational compromises?
You don’t get everything you want all the time. So
work out something in the middle and move on down the road. What we’ve done on
immigration is to leave well over a million people (and maybe a lot more) in
limbo.
America is supposed to be better than this. I am ashamed. It is
just another very sad example of how we are broken. Schumer? Pelosi? You should
be ashamed. As should all the Republicans who defeated the DACA bills last
month in the Senate. Sometimes you have to do what is right for the country.
Being worried that you might give Trump a “W” if you compromise is not what I
call thinking about the country.
The anti-immigration people are simply economically ignorant. We
need more immigrants, not fewer.
I travel in a few weeks to Fort Lauderdale, then Chicago, then New
York and Raleigh for mostly private speaking engagements. I’ve been putting off
a trip to New York for too long, and I have too many people I need to see.
And finally, just a brief note to those of you who have been
asking about the changes that are afoot. I promise that I will let you in on
the details very soon. Some of you think I’m building up to a big announcement
about the future of this letter; but let me address those questions in one fell
swoop: Thoughts from the
Frontline is not being put out to pasture! I can promise you that
the coming changes are exciting and will benefit both you and me. But rest
assured that you will continue to get this letter for free for as long as I can
write it.
And now it really is time to hit the send button. Have a great
week!
Your wondering how we will balance the budget analyst,
John Mauldin
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