If you are confused about the “tax cut” bill, you are not alone. I took two semesters of tax law way back in the day, and I do my own taxes every year, so here’s my explanation of just one of the ways the “tax reform” cuts taxes but actually leaves you paying more.
Step One: Cut the tax rate. Now you can say you have cut taxes.
Terry Taxpayer is a single person with a taxable income of $50,000 a year. Terry’s 2017 tax rate is 10 percent on the first $9,325 plus 15 percent of the amount from $9325 to $37,950 plus 25 percent of the amount from $37,950 to $50,000.
The Senate proposes cutting the 25 percent to 22.5 percent. That would lower the taxes owed by about $300. A tax cut, right?
Not quite – because the tax rate change is only part of the “tax reform” package.
Step Two: Change the rules on personal exemptions.
Right now, a single person gets a personal exemption of $4,050. That reduces the amount of taxable income. So the single person in our example actually earned $54,050 but the personal exemption reduced their taxable income to only $50,000.
The tax reform bills would abolish the personal exemption. That means the entire $54,050 would be taxable income. The tax on that additional $4050 would be a little more than $900. $900 in additional taxes because of abolishing the personal exemption minus $300 in savings from the tax rate cut equals a tax increase of $600.
Just that one change – abolishing the personal exemption – turns the tax rate cut into an actual tax increase.
This is just one small example of how the double talk on tax cuts works. Besides abolishing the personal exemption, the tax reform plan has other ways to turn a tax rate cut into an actual tax increase for the middle class, including ending medical deductions (House bill) and ending state tax credits (both House and Senate bills).
The “tax reform” bills are complicated in the extreme, but the bottom line is that they will cut corporate taxes and will benefit the rich at the expense of the rest of us.