The tax reform proposal from congressional Republicans released earlier this month has received plenty of scrutiny, and opinions are sharply divided on whether the tax plan is a good blueprint for making changes to the U.S. tax system. Plenty of policy issues contained within the proposal have started considerable debate, such as whether it’s appropriate to phase out estate taxes or eliminate deductions on state and local income taxes.
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Yet amid hundreds of pages of legislation, there’s one highly visible provision that has raised eyebrows and become a key target among opponents of the bill. Its optics invited criticism from opponents of the plan, but its relatively modest impact seems to make it an unlikely focal point around which to rally opposition.
Much ado about 2 percentage points?
One key part of the Republican tax plan was to simplify the existing structure of tax brackets. Current law calls for seven brackets, with rates ranging from 10% to 39.6%. The plan replaces them with four brackets, establishing new rates from 12% to 39.6%.
What many opponents of the plan have focused on is that increase in the lowest rate from 10% to 12%. Many headlines have asserted the inherent unfairness of this provision and used it as a symbol of their views on the entire proposal’s true intent, especially in light of earlier versions of the plan that would have had just three tax brackets and reduced what top-income earners pay from 39.6% to 35%.
That said, it’s easy to understand the intent that Republicans had in coming up with the 12% rate. The new bracket is intended to combine what used to be the 10% and 15% brackets. With the size of the 15% bracket being three times larger than the 10% bracket, using the weighted average of the two would have put the combined rate closer to 13% to 14%. Using 12% instead indicated a willingness to introduce an overall tax reduction for the larger number of taxpayers in the 15% bracket.
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Still, the problem is what happens on the margins. Single filers at the top of the current 10% bracket — taxable income of $9,525 — would pay an additional $190.50 in tax if they have to pay 12%. Joint filers would see double that increase, or $381, if they have taxable income of $19,050. That $381 might not sound like a lot of money, but for families making $10,000 to $20,000 in taxable income, it’s a considerably harder amount to pay than many higher-income taxpayers would realize.
Taking the plan as a whole
The better rebuttal from Republicans is that it’s not fair to look at just the new tax rates and brackets in isolation. Moves to double the standard deduction, raise the child tax credit, and provide modest tax credits for non-child dependents should reduce taxable income levels outright for low- and middle-income families.
Yet coming up with the calculations to prove that there’s a net benefit to these families is difficult and generally requires individual tailoring. Even as low- and middle-income taxpayers get benefits from higher standard deductions, they risk losing deductions for items like student loan interest and moving expenses. Changes to educational tax credits could also have a negative impact on some families. How those factors offset each other is difficult to determine in a general sense, requiring looking closely at each taxpayer’s particular situation.
Looking back at history
In the end, Republicans have a vested interest in preserving the 10% tax bracket. Since its inception as part of the Bush tax cuts in the early 2000s, many Republican lawmakers have argued that allowing the 10% bracket to fall prey to sunset provisions would be unfairly punishing working families. When the 10% bracket was made permanent in the mid-2000s, many lawmakers on both sides of the aisle were quick to trumpet the positive impact on Americans on the whole.
It will be a challenge for lawmakers to take the proposed 12% bracket and simply cut it back to 10% while still meeting the budget requirements of the reconciliation process. With further movement in the tax bracket structure, however, it might be possible to restore a 10% bracket while still achieving the goal of simplifying the tax laws for all.
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