Tax Reform's Phase Two Should Make Middle Class Tax Cuts Permanent

forbes.com/sites/ryanellis/2018/03/26/tax-reforms-phase-two-should-make-middle-class-tax-cuts-permanent
 

Speaker of the House Paul Ryan, R-Wis., joined from left by House Majority Whip Steve Scalise, R-La., Rep. Rodney Davis, R-Ill., and House Majority Leader Kevin McCarthy, R-Calif., leaves a news conference at the Capitol in Washington, Wednesday, Feb. 14, 2018. Ryan confirmed that Rep. Trey Gowdy, R-S.C., chairman of the House Oversight Committee, updated him that the watchdog panel has decided to launch a probe related to the background investigation and security clearance for White House aide Rob Porter who has resigned due to domestic abuse allegations against him. (AP Photo/J. Scott Applewhite)

There's been a lot of talk lately about a "phase two" of tax reform to be considered later this year in the U.S. House of Representatives. There is no shortage of good, pro-growth ideas: death tax repeal, a capital gains tax cut, and permanent business expensing are three which immediately spring to mind.

Politically, however, it would make some sense to split these items up into several votes. In the lead-up to the Bush tax cuts in 2001, the House voted every year (separately) on tax cut items like killing the death tax and increasing IRA limits. No reason not to do that again.

As part of this communications-smart policy strategy, Congress ought to do a tax cut aimed squarely at the middle class. The proposal should do nothing more than make permanent the middle class tax cuts and reforms which phase out in the Tax Cuts and Jobs Act. Democrats claim that they want to extend tax relief to the middle class, so this is their chance to do it. So that no one can hide behind a concern over deficits, this package of permanent tax relief can be paid for by complementary and offsetting tax hikes in the new tax law also set to expire. Full credit here should be given to Scott Greenberg from the Tax Foundation, who gave me the idea for what you'll see below.

The goal of this exercise, communications-wise, is to remind the middle class that it's Congressional Republicans and the Trump Administration that cut their taxes, and that they want to keep those taxes low on a permanent basis. If the package becomes law, we'll have sealed in place tax cuts for working Americans and made it easier to further limit itemized deduction-dependent industries like state/local governments and housing. If the package doesn't become law, this is a heck of a talking point for tax cutters in the mid-term elections.

Call it the "Middle Class Tax Cut Act of 2018." Below is a mix of five key elements. The ten year scores are my own, working off of the budget estimates provided at the time of the tax law's passage. Since these items all expire after 2025, the revenue numbers are for the three remaining years of the FY 2019-2028 budget window. Beyond that, their respective sizes should grow sufficiently to pay for themselves on a permanent basis.

Doubling the standard deduction (est. score $330 billion). The tax law doubled the standard deduction to $24,000 for a married couple, $18,000 for a single parent, and $12,000 for a single person. As a result, the number of married couples itemizing their deductions will decline from 44 percent under the old law to 16 percent under the new law, a nearly two-thirds reduction. Unmarried taxpayers' propensity to itemize will decline to near statistical irrelevance. Besides being a middle class tax cut, this is an extremely important development for future tax reforms.

Doubling the child tax credit and requiring Social Security numbers (est. score $230 billion). The tax law doubled the child tax credit from $1000 to $2000 and made it available to more families than today. It also created a $500 tax credit for older child dependents and non-child dependents. In order to benefit from the child tax credit, Social Security numbers of children must be provided as an anti-fraud, anti-illegal immigration protection.

Got questions about how new Tax Law will affect you?  Don’t pay more in taxes than you’re required.  Give us a call today at 636-394-5524 and let us help guide you through the complexities of these new rules.