Tax Reform Benefits all Americans

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Everyone looks at a tax bill through his own individual prism. But to judge it more accurately, we need to consider how it will affect others, too.

After all, tax reform won’t apply to just one segment of the population. Directly or indirectly, all of us will feel it — some of us quite profoundly.

Most Americans would receive a significant cut under the Republican tax plan now before Congress. An analysis from the Joint Committee on Taxation shows that all income groups would see immediate dividends.

Many tax-cut opponents are crying foul because those in the top-income brackets would see a greater savings under the tax plan. But we have to remember that they pay much more than those in other income groups. In fact, as a percent of their income, they see the smallest benefits.

IRS figures show that the top 5 percent of earners took in 34 percent of the national income in 2011, but paid 56 percent of all federal income taxes that year. Meanwhile, the bottom half of all earners took in 12 percent of the income – and paid only 3 percent of the taxes.

With such a sharply progressive tax system, this is only natural. But it does show how ludicrous it is for tax-cut foes to point to the higher savings that the wealthy would realize under the current bills as evidence of how “unfair” they allegedly are. (And as it turns out, some who make a larger salary won’t see that much benefit — indeed, some will even see their tax bills go up.)

Let’s look at a few taxpayer scenarios and how each would change under the House and Senate versions of the tax-cut bills working their way through Congress:

  • A single teacher with median earnings of $50,000 per year. Under the current tax code, “Tom” pays $5,474 each year in federal income taxes. His tax bill would decline by $914, or 17 percent, (to $4,560) under the House’s plan and by $1,104, or 20 percent, (to $4,370) under the Senate’s plan. Reason: A higher standard deduction of $12,000, and a marginal tax rate that, under both the House and Senate versions, goes from 25 percent to 12 percent.
  • A married couple with median earnings of $75,000 per year. “John and Sarah Jones” are homeowners with three children. John is a sales representative who earns $55,000 a year, while Sarah works part-time as a nurse, making $20,000. Under the House’s tax plan, their tax bill would decline by $1,033; under the Senate’s plan, it would drop by $2,014. Reason: A marginal tax rate cut from 15 percent to 12 percent and a higher child tax credit (from $1,000 to $1,600 under the House plan, and $2,000 under the Senate one).
  • A married couple with median earnings of $1.5 million per year. “Peter and Paige Smith” are homeowners with two children. Peter works for a technology startup, and had an unusually good year, earning $1.4 million; Paige earns $100,000 as an accountant. Under current law, the Smiths pay $439,275 in federal income taxes. Their tax bill would rise by $87,993 under the House plan and drop by $1,313 under the Senate’s. Reason: They would lose some or all of their state and local tax deductions, and their income is too high to claim any exemptions or credits. Under the House plan, their top rate would rise to 48.5 percent; Under the Senate’s, it would fall to 41.4 percent.

However, we need to look at more than just the numbers. We need a tax code that takes less from Americans, yes, but we also need a simpler system that is more transparent.

There’s a reason that tax preparation is viewed by most Americans as an arcane science that must be done by professionals. The code is thousands of pages long and is ludicrously complex. It confounds even the IRS, with studies showing that Americans don’t get the same answer twice when they contact the agency with questions.

The tax reform under consideration in Congress isn’t perfect. But it will lower taxes across the board and go a long way toward jump-starting America’s struggling economy. What’s not to like?

Ed Feulner is president of The Heritage Foundation