Why Tax Reform Flounders: The Case Of Doubling The Standard Deduction

This post originally appeared on TaxVox.

Do you want to know why tax reform is so hard? Consider one seemingly simple idea that has been floated by President Trump and congressional Republicans in their Unified Framework: roughly doubling the standard deduction. The closer you look at this proposal, the more you see how complicated it is.

Is doubling the standard deduction a good idea? Well, maybe. By granting more taxpayers a larger reduction in taxable income without making them itemize a list of specific deductible expenses, boosting the standard deduction can substantially simplify the tax filing process. It would also reduce taxes for some middle-income households. But…

It costs money. The Framework would partially offset the expense by eliminating the personal exemption. But…

Exchanging a larger standard deduction for repeal of the personal exemption raises the relative burden of taxes on households with children. But…

The Framework attempts to offset the elimination of personal exemption with a bigger child credit. That might help reduce some of the higher taxes caused by repealing the personal exemption. But…

These adjustments cost revenue and so would reduce the amount of rate reduction that Congress can pay for. And…

The share of households (including nonfilers) that itemize with the larger proposed standard deduction would be reduced, perhaps to as little as 5 percent, depending upon what happens to specific deductions. But…

If Congress reduces the number of itemizers, it would also reduce the number of people who’d take deductions for charitable giving, home mortgage interest, and state and local taxes paid. That, in turn, has charities, homebuilders, and state and local government officials worried. And…

Retaining tax incentives only for the highest income households makes zero sense for provisions meant to encourage families to own homes or give to charity. But…

Congress could create alternative subsidies for charitable donors, homebuilders, and state and local governments. But…

That could cost more foregone revenue and reduce the size of any tax rate reduction that could be paid for. And, whoops…

So far, we’ve pretty much forgotten about the poor and moderate-income taxpayers who would benefit little or not at all by an increase in the standard deduction. But…

To help them requires yet more money and reduces the amount of rate reduction that can be financed in a tax reform package. And, thus,

Each decision on each individual change not only causes new interactions affecting the amount of revenue other provisions in a bill would gain or lose, but…

It alters the distribution of winners and losers among individuals and industries that also must be addressed. And…

These are only some of the effects of one simple reform Now, think of what Congress and the President must tackle in a bill that revises the taxation of capital and labor, multinational corporations and partnerships, pensions and insurance. And…

You will get some inkling of why, as the president might say, “nobody knew” tax reform would be so hard.


3 Comments on “Why Tax Reform Flounders: The Case Of Doubling The Standard Deduction”

  1. Chip Watkins says:

    Anyone who was paying attention to the 2-plus year process thst preceded enactment of the Tax Reform Act of 1986 knows how difficult tax reform can be.

    • Michael Meeropol says:

      And probably nobody knows REALLY how complicated real tax reform can be than Gene Steuerle — the man who WROTE Treasury One in 1984 and chaired a horse-trading committee of tax experts in the run-up to finally crafting the final compromise that WAS the tax reform act of 1986. He describes in very well in THE TAX DECADE which should be required reading for EVERYBODY truly committed to tax reform (which I doubt Ryan and Minuchin are!!).

      I think there was a (positive) perfect storm in 1984-86 — Reagan (a former economics major) became hooked on the idee fixe of a REVENUE NEUTRAL law – he had succeeded in cutting taxes with the ERTA so he had delivered on his first economic revolutionary proposal. He had been reelected in a landslide —

      AND — there was divided government in Congress (with the Democrats taking back the Senate in 1986) That meant whatever the merits of any proposal, everyone knew there had to be compromise.

      in 2017, the Republicans control everything and there seems to be no interest in them compromising with ANYONE but themselves —

      And despite people thinking Reagan was an air-head, he had a bunch of real principles and his major idee fixe became a guiding star for the entire process.

      TRUMP is so much more clueless than Reagan on his worst days and he insists on referring to his “proposals” as a TAX CUT rather than reform — even though Ryan wants to call it reform.

      So Gene’s details are useful but unfortunately, I doubt any of the people crafting the bill (s) in either house will pay any attention — staffers will work around the edges but the final bill will almost certainly be a monstrosity that hopefully will choke on its own inconsistencies and the extremism of the true believers in the so-called FREEDOM CAUCUS — which will frighten away enough Republican Senators that it will die a well-deserved death and we will — surprise surprise — Muddle On!

  2. Doubling the standard deduction gets us half-way to the higher standard deduction proposed by me to the Bush Tax Reform Task Force and by Michael Graetz in his book, 100,000 Unnecessary Returns. Both Michael and I proposed larger Child Tax Credits or prebates, I through a Subtraction VAT/Net Business Receipts Tax/Business Income Tax (different names for the same thing) and Michael through rebates to payroll taxes (which I would fold into the Subtraction VAT). The key feature of both of our plans is a 13% Value Added Tax (separate from the Subtraction VAT in its current form). Without that feature, changing the Standard Deduction does not work. The higher deduction removes people from the tax roles who now make $75,000 single/$150,000 joint filers. Off-loading payroll and income taxation for these individuals lower their gross but not their net incomes. I think most of these people will be fine with trading a few deductions for not having to file at all.

    My calculations for a higher child tax credit ($1000 per month per child) include getting rid of exemptions, TANF, SNAP and the mortgage interest and property tax deductions and even then a small subtraction VAT increase will likely be necessary. Again, this comes through an employer consumption tax, so individual filing remains unnecessary except for richer individuals, who could pay through employers if they want to disclose all their investments. That is doubtful, so an income and inheritance surtax remains with multiple rates but no special rates.

    Will this Administration and Congress pass either my proposal or Michael’s. They should and they won’t. Trump’s mission has been to undo all things Obama, including his allowing the Bush rates to expire. He is also under the impression that giving money to job creators will encourage hiring. It won’t unless you want jobs overseas. More money is an incentive to cut labor costs, not increase them to be nice. Capitalism is not nice. Whatever plan that comes forward, unless it has major income support sweeteners for families, is not worth passing, so I am glad that this will be hard for the President and Congress.


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