Thursday, November 16, 2017

Who Will See Their Taxes Go Up under the House and Senate Plans?

As shown at the end of my last post, Example 4 released by the House Ways and Means Committee gives a tax increase if the wages are reduced to $45,000. This reveals an important point. It isn't just taxpayers who lose their deduction for medical or state and local taxes who can end up paying more in taxes. That appears to also occur for lower-wage workers who have no children but already have as many itemized deductions as the new standard deductions, even when they can still take those deductions. The following tables and plots show the change in taxes for such taxpayers, single and married, under the House and Senate tax bills. They were generated by selecting Examples A and B in the interactive application at this link.
Example A - Single Person Making $25,000 Per Year with $12,000 in Deductions             Example B - Married Couple Making $50,000 Per Year with $24,000 in Deductions

House                              Senate                                                House                              Senate
         Names      Taxes                   Names      Taxes                                      Names      Taxes                   Names       Taxes
1 Current 2017  895.00000          1 Current 2017 895.000000                             1 Current 2017 1790.00000          1 Current 2017 1790.000000
2   House Bill 1260.00000          2  Senate 2017 869.500000                             2   House Bill 2520.00000          2  Senate 2017 1739.000000
3       Change  365.00000          3       Change -25.500000                             3       Change  730.00000          3       Change  -51.000000
4     % Change   40.78212          4     % Change  -2.849162                             4     % Change   40.78212          4     % Change   -2.849162

As can be seen in the first table, a single person making $25,000 per year and having $12,000 in deductions (same as the new standard deduction) will now have to pay over 40 percent more in taxes under the House plan. The result is the same however the $12,000 is divided up among deductions, regardless of whether or not those deductions are still allowed. As can be seen in the third table, a married couple making $50,000 per year and having $24,000 in deductions (same as the new standard deduction) will now have to pay over 40 percent more in taxes under the House plan. As before, the result is the same however the $24,000 is divided up among deductions. In fact, it's interesting to note that the taxes in this table are exactly double the taxes in the prior table and the percent change in taxes is the same 40.78 percent increase. This is because a number of other key variables like income and standard deduction are also exactly double. In any case, changing the "Tax Plan 1" select list to "Current 2018" causes both tax increases to rise to 43.37 percent. This may be a better comparison since the House plan is proposed to take effect in 2018.

The second and fourth tables and the last two plots show the change in taxes under the Senate plan. As can be seen, both single and married taxpayers get a small tax cut of 2.8 percent under this plan. The main reasons for the difference from the House plan is chiefly the larger family credit of $500 (versus $300 in the House) and retention of the 10 percent tax bracket. Compared against the Current 2018 tax brackets, single and married taxpayers get a slightly smaller tax cut of 1.75 percent.

What happens if the taxpayer currently has deductions that are higher than the new standard deduction? If the additional deductions have not been repealed, their should be little difference as the taxpayer can continue to deduct them. The result is very much different if those additional deductions have been repealed. The following tables and plots show the change in taxes for such taxpayers, single and married, under the House and Senate tax bills. For single taxpayers, they show the effect of $3,000 of additional repealed deduction and for married taxpayers, they show the effect of $6,000 in additional repealed deductions. The tables and plots were generated by selecting Examples C and D in the same interactive application.

Example C - Single Person Making $25,000 Per Year with $15,000 in Repealed Deductions    Example D - Married Couple Making $50,000 Per Year with $30,000 in Repealed Deductions

House                              Senate                                                House                              Senate
         Names     Taxes                    Names     Taxes                                       Names     Taxes                    Names      Taxes
1 Current 2017  595.0000           1 Current 2017 595.00000                              1 Current 2017 1190.0000           1 Current 2017 1190.00000
2   House Bill 1260.0000           2  Senate 2017 869.50000                              2   House Bill 2520.0000           2  Senate 2017 1739.00000
3       Change  665.0000           3       Change 274.50000                              3       Change 1330.0000           3       Change  549.00000
4     % Change  111.7647           4     % Change  46.13445                              4     % Change  111.7647           4     % Change   46.13445

As can be seen in the first table, a single person making $25,000 per year and having $15,000 in deductions ($3,000 more than the new standard deduction) will now have to pay over 111 percent more in taxes under the House plan. The result is the same however the $15,000 is divided up among deductions, as long as they include at least $3,000 in deductions that are being repealed. As can be seen in the third table, a married couple making $50,000 per year and having $30,000 in deductions ($6,000 more than the new standard deduction) will now have to pay over 111 percent more in taxes under the House plan. As before, the result is the same however the $30,000 is divided up among deductions, as long as they include at least $6,000 in deductions that are being repealed. As before, it's interesting to note that the taxes in the third table are exactly double the taxes in the first table and the percent change in taxes is the same 111.76 percent increase. Again, this is because a number of other key variables like income and standard deduction are also exactly double.

The second and fourth tables and the last two plots show the change in taxes under the Senate plan. As can be seen, both single and married taxpayers get smaller tax increase of 46.13 percent under this plan. As before, the main reasons for the difference from the House plan is chiefly the larger family credit of $500 (versus $300 in the House) and retention of the 10 percent tax bracket.

The prior examples look at cases with the same deduction across all income levels. State and local taxes, of course, will be more related to a percentage of the taxpayer's income. The following tables and plots show the change in taxes for taxpayers paying 10 percent of their income in state and local taxes, under the House and Senate tax bills. The tables and plots were generated by selecting Examples E and F in the same interactive application. For these examples, the maximum wage is automatically increased from $200,000 to $2,000,000 since this negative effects of this change mainly effects taxpayers with higher incomes. Also, the specific wages for the tables were chosen to be close to local minimums shown in the plots.

Example E - Single Person with 10 Percent of Income in State and Local Taxes             Example F - Married Couple with 10 Percent of Income in State and Local Taxes
                     ($470,000 in wages)                                                                      ($530,000 in wages)
      
House                              Senate                                                House                              Senate
         Names       Taxes                  Names        Taxes                                    Names        Taxes                 Names        Taxes
1 Current 2017 121723.0500         1 Current 2017 121723.05000                           1 Current 2017 1.309980e+05        1 Current 2017 1.309980e+05
2   House Bill 134150.0000         2  Senate 2017 136296.00000                           2   House Bill 1.388000e+05        2  Senate 2017 1.330920e+05
3       Change  12426.9500         3       Change  14572.95000                           3       Change 7.802000e+03        3       Change 2.094000e+03
4     % Change     10.2092         4     % Change     11.97222                           4     % Change 5.955816e+00        4     % Change 1.598498e+00

As can be seen in the first table, a single person making $470,000 per year and paying 10 percent of their wages in state and local taxes will now have to pay 10.2 percent more in taxes under the House plan. The second table shows that this increases to just under 12 percent under the Senate plan. The reason for the difference appears to be slightly more favorable tax brackets for a single taxpayer with those wages in the House bill. In any case, the first plot shows that the increase in taxes continues through a 2 million dollar income at about 10 percent under the House bill. The third plot shows that the increase in taxes through a 2 million dollar income becomes slightly smaller under the Senate bill. This appears to be due to the cut in rates from 39.6 to 38.5 percent under the Senate bill for incomes over $500,000.

As can be seen in the third table, a married couple making $530,000 per year and paying 10 percent of their wages in state and local taxes will now have to pay about 6 percent more in taxes under the House plan. The fourth table shows that this decreases to about 1.6 under the Senate plan. The reason for the difference appears to be slightly more favorable tax brackets for a married couple with those wages in the Senate bill. In any case, the increase in taxes through a 2 million dollar income is about 6.6 and 4.1 percent at a 2 million dollar income under the House and Senate bills, respectively, according to the application. As can be seen in second and fourth plots, these increases become close to zero (a tax increase of 1.6 percent and a tax cut of 2.8 percent according to the application) at a 1 million dollar income. This upward bulge at 1 million dollars appears to be due to the fact that both plans increase the income at which the tax bracket starts from $470,700 to 1 million dollars.

A final concern is the effect of the tax plans on non-child dependents. Both plans benefit taxpayers with children in that the child credit is increasing under both. The effect on non-child dependents is less clear, however. This is because both plans eliminate the Exemptions but provide a "Family Credit" to compensate. The following tables and plots show the change in taxes for single taxpayers with one non-child dependent and married couples with two non-child dependents, under the House and Senate tax bills. The tables and plots were generated by selecting Examples G and H in the same interactive application.

Example G - Single Person Making $25,000 Per Year with 1 Non-Child Dependent             Example H - Married Couple Making $50,000 Per Year with 2 Non-Child Dependents

House                              Senate                                                House                              Senate
         Names      Taxes                   Names     Taxes                                       Names      Taxes                   Names      Taxes
1 Current 2017 1116.25000          1 Current 2017 1116.2500                              1 Current 2017 2232.50000          1 Current 2017  2232.5000
2   House Bill  960.00000          2  Senate 2017  369.5000                              2   House Bill 1920.00000          2  Senate 2017   739.0000
3       Change -156.25000          3       Change -746.7500                              3       Change -312.50000          3       Change -1493.5000
4     % Change  -13.99776          4     % Change  -66.8981                              4     % Change  -13.99776          4     % Change   -66.8981

As can be seen from the plots, both tax plans provide tax cuts for these two cases for all incomes up through at least $200,0000. However, the Family Credit of $300 under the House plan is currently scheduled to expire in 5 years. For this reason, it makes sense to look at the House Plan without Family Credits. It also makes sense to look at the effect of the tax plans on families with additional non-child dependents since these families exist. The following tables show the effect of the tax plans on single taxpayers with 1 to 3 non-child dependents and on married couples with 1 to 6 non-child dependents.

Example G - Single Person Making $25,000 Per Year with N Non-Child Dependent             Example H - Married Couple Making $50,000 Per Year with N Non-Child Dependents

House                                     Senate                                         House                                    Senate

   Non-Child   Tax Cut(-)   w/o Family       Non-Child   Tax Cut(-)                         Non-Child   Tax Cut(-)  w/o Family       Non-Child   Tax Cut(-)
  Dependents  or Increase      Credits      Dependents  or Increase                        Dependents  or Increase     Credits      Dependents  or Increase
           1    -13.99776     39.75364               1     -66.8981                                 1    -21.83099     9.859155              1     -56.37324
           2      1.538462   140                     2    -120.0769                                 2    -13.99776    39.75364               2     -66.8981
           3     46.93878    536.7347                3    -357.3469                                 3     -4.985337   82.9912                3     -85.9824
                                                                                                    4      1.538462  140                     4    -120.0769
                                                                                                    5     13.96648   248.6034                5    -185.0279
                                                                                                    6     46.93878   536.7347                6    -357.3469
As can be seen in the first and third tables, elimination of the Family Credit causes tax cuts to become tax increases in the House bill. These increases get larger with additional non-child dependents. With the Family Credits, the House bill provides a tax cut for a single payer with one non-child dependent and for a married couple with up to 3 non-child dependents. However, additional non-child dependents beyond this cause the tax cuts to become tax increases.

Under the Senate bill, both single and married taxpayers appear to get a tax cut with any number of non-child dependents. In fact, the percentage of the tax cut grows as the number of non-child dependents grow. This would suggest that the $500 Family Credit in the Senate bill is large enough to make up for the loss of the exemption but the $300 Family Credit in the House bill is not. This actually makes sense since the exemption amount for 2017 is $4,050. Multiplying this by the 12 percent rate paid by the above examples gives $486. Hence, the House bill $300 Family Credit in the House bill is far too small to compensate for the loss of the exemption but the $500 Family Credit in the Senate bill is large enough. The brackets in the Senate bill also help in that the first $9,525 for single taxpayers and $19,050 for married taxpayers is taxed at 10 percent.

Example I was created from Example G by increasing the number of non-child dependents from 1 to 2. Similarly, Example J was created from Example H by increasing the number of non-child dependents from 2 to 4. The following tables and plots were generated by selecting these two new examples in the same interactive application.

Example I - Single Person Making $25,000 Per Year with 2 Non-Child Dependent             Example J - Married Couple Making $50,000 Per Year with 4 Non-Child Dependents

House                              Senate                                                House                              Senate
         Names      Taxes                   Names     Taxes                                       Names       Taxes                  Names      Taxes
1 Current 2017 650.000000          1 Current 2017  650.0000                              1 Current 2017 1300.000000         1 Current 2017  1300.0000
2   House Bill 660.000000          2  Senate 2017 -130.5000                              2   House Bill 1320.000000         2  Senate 2017  -261.0000
3       Change  10.000000          3       Change -780.5000                              3       Change   20.000000         3       Change -1561.0000
4     % Change   1.538462          4     % Change -120.0769                              4     % Change    1.538462         4     % Change  -120.0769

As mentioned in my prior post, the biggest concern raised by the House bill is likely the higher taxes that they represent to some lower income taxpayers in the first year and to many more lower income taxpayers in future years. The Senate bill has similar problems.

In any event, the above tables and plots do show several cases in which certain groups of taxpayers will immediately pay higher taxes. The plots for Examples A and B show that taxpayers who currently have deductions as large as the new standard deductions ($12,000 for single and $24,000 for married) will likely pay more if their incomes are below about $35,000 for single and $75,000 for married. Such taxpayers should have a tax cut under the current Senate plan, however. The plots for Examples C and D show that taxpayers with the above-mentioned incomes that have additional deductions that are expiring on the order of $3,000 for single and $6,000 for married will see tax increases under either plan. The plots for Example E and F show that taxpayers with state and local income taxes that are 10 percent of their income will see tax increases above about $250,000 for single taxpayers. For married taxpayers, the tax increases will occur above incomes of about $350,000 for the House plan and $500,000 for the Senate plan. Example I and J and the preceding tables show that single taxpayers with two or more non-child dependents and married taxpayers with 4 or more non-child dependents will see tax increases. Examples I and J and the preceding tables show that some single taxpayers with two or more non-child dependents and married taxpayers with 4 or more non-child dependents will see tax increases under the House plan. Those taxpayers will have lower incomes, between about $25.000 and $30,000 for single and between about $50,000 and $60,000 for married. Under the Senate plan, however, these taxpayers will all see tax cuts.

It should be noted that these examples don't include a number of major components that should greatly favor taxpayers with higher income. As can be seen in this article, those components include repeal of the alternative minimum tax, a large tax cut for some “pass-through” income of individual business owners, and the large corporate tax cut. There's also the repeal of the estate tax which will chiefly benefit taxpayers of great wealth, if not great income. Hence, it would seem very possible that both plans are heavily tilted to those with high incomes and/or wealth. In any event, the examples show that there are a number of lower-income taxpayers who will see their taxes increase. There are also a number of higher-income taxpayers who will see their taxes increase due to the elimination of the deduction for state and local income taxes.

Monday, November 6, 2017

The Problems with "Taxpayer Examples"

On November 2, a press release from the office of Speaker Paul Ryan announced the introduction of the Tax Cuts and Jobs Act. It begins as follows:

Today, House Speaker Paul Ryan (R-WI), Ways and Means Committee Chairman Kevin Brady (R-TX), and other members of House leadership and the Ways and Means Committee introduced the Tax Cuts and Jobs Act—bold legislation to overhaul America’s tax code for the first time in 31 years. With this bill, a typical middle-income family of four, earning $59,000 (the median household income), will receive a $1,182 tax cut.

At the end of the release is a link to descriptions of this and several other examples of how the proposed tax cuts would save money for various types of taxpayers. I've created an R Shiny application which can interactively show the tax savings for the first four examples and other variations. That application can be accessed at this link.

Selecting "Example 1" in the "Tax Examples" select list causes the following table and plot to be output:

         Names       Taxes Released
1 Current 2017  1582.50000     1582
2   House Bill   400.00000      400
3       Change -1182.50000    -1182
4     % Change   -74.72354         

The second column shows the calculated taxes and the third column shows the taxes reported in the press release. As can be seen in the table, they are almost identical. The plot, on the other hand, shows the percent taxcut for the example but does so for all incomes from $0 to $200,000 with the example's income denoted by a red vertical line. As can be seen, this income has one of the higher tax cuts among those displayed.

Selecting "Example 2" in the "Tax Examples" select list causes the following table and plot to be output:

         Names       Taxes Released
1 Current 2017  -670.54660         
2   House Bill -1276.79660  < -1000
3       Change  -606.25000   < -700
4     % Change    90.41132         

Note: Taxes for both plans include an EITC of $1536.7966 (using the 2017 formula)

As can be seen in the third column of the table, the press release was somewhat vague about the tax numbers for this example, stating that "Cindy will receive a tax refund of over $1,000" which is "over $700 larger than the refund she receives today. However, the second column shows her paying taxes in both cases, not getting a refund. The $1277 tax refund for the House Bill can be verified by the following calculation:

($30,000 - $12,000) * 0.12 - $1600 - $300 - $1537 = -$1277
In this calculation, $12,000 is the standard deduction for single taxpayers, 0.12 is the 12% tax rate, $1,600 is the child credit for the child, and $300 is the family credit for the mother. Finally, the $1537 is the Earned Income Tax Credit (EITC) as calculated using the 2017 formula.

Hence, the figure for the House Bill refund is "over $1,000" but it is just $606 more than the current refund, not "over $700 larger than the refund she receives today". To my knowledge, the House Bill has not changed how EITC is calculated and is using the 2017 formula. In any case, $606 rather than "over $700" is a relatively small disagreement.

Selecting "Example 3" in the "Tax Examples" select list causes the following table and plot to be output:

         Names       Taxes Released
1 Current 2017  5173.75000     5173
2   House Bill  4020.00000     3872
3       Change -1153.75000    -1301
4     % Change   -22.30007         

As can be seen from the table, the numbers for the Current 2017 taxes do match but the calculation for the House Bill taxes is $148 greater than the releases figure. The $4,020 figure can be verified by the following calculation:

($48,000 - $12,000) * 0.12 - $300 = $4,020.
Hence, the $3,872 figure appears to be in error. Unlike the prior two examples, however, the plot shows that the income of $48,000 provides among the lower tax cuts for incomes under about $60,000.

Finally, selecting "Example 4" in the "Tax Examples" select list causes the following table and plot to be output:

         Names       Taxes Released
1 Current 2017 12180.00238    12180
2   House Bill 10450.00000    11050
3       Change -1730.00238    -1130
4     % Change   -14.20363         

The press release specifies that the taxpayers in this example "will pay $8,400 in mortgage interest and $6,900 in state and local property taxes". However, it does not specify how much they paid in state and local taxes despite stating that they were in a "high tax state". For this reason, I calculated that paying 7.64347 percent of their income in state and local taxes would have provided them with the deduction to achieve the $12,180 figure for Current 2017 taxes given in the press release. With no deduction for state and local taxes, their taxes would have been $14,377.50.

As can be seen from the table, the calculated taxes for the House Bill is $10,450, exactly $600 less than the $11,050 figure given in the press release. This suggests that the figure in the press release may have been calculated without including the family credit of $300 per person. This can be checked by selecting "House Bill w/o Family Credits" in the "Tax Plan 2" select list. In that case, the following table and plot are output:

                          Names        Taxes Released
1                  Current 2017 12180.002375    12180
2 House Bill w/o Family Credits 11050.000000    11050
3                        Change -1130.002375    -1130
4                      % Change    -9.277522         

Now, the calculated taxes match those in the press release. Also, the plot shows that the income of $115,000 has about the highest tax cut among those displayed.

The selection of "House Bill w/o Family Credits" is appropriate for another reason. A Washington Post article points out that the "new Family Flexibility Credit of $300 for each tax filer and another $300 for a spouse" expires after five years. It links to an analysis by David Kamin, a tax law professor at New York University which goes into more details. It shows that, because of this and other provisions in the House Bill tax bill, the tax cut shown in the first example would turn into a tax hike over current law in 2024 and beyond.

The above two plots show something else that's interesting. In the fourth example, the House Bill represent a tax hike for some lower income taxpayers in the first year. For example, selecting "Example 4" and changing "Wages, salaries, tips, etc." to 45000 causes the following table to be output:

         Names       Taxes Released
1 Current 2017 1816.043850    12180
2   House Bill 1920.000000    11050
3       Change  103.956150    -1130
4     % Change    5.724319         
Hence, the House Bill represent a 5.7 percent tax increase in this case. Of course, the 7.64347 percent of income for state and local taxes may be a bit high for this income level. Still, you can move this number to "Medical and dental expenses (% over 10% of income)" and set state and local taxes to 0 and get the same result. Or, alternately, you can set both medical and state & local taxes to zero, set "Charitable contributions" to $3,440 and get about the same result.

The biggest concern raised by the House Bill bill is likely the higher taxes that they represent to some lower income taxpayers in the first year and to many more lower income taxpayers in future years. Also, the above plots show that it is helpful to look at taxpayer examples over broad ranges of income. Still, it is very concerning that the examples released by the office of Speaker Paul Ryan (which came from the Committee of Ways and Means) appear to contain a number of errors. This suggests that, even for something as seemingly simple as the calculation of taxes under various plans, publications should show their work.

Who Will See Their Taxes Go Up under the House and Senate Plans?

About Me

I became interested in U.S. budget and economic matters back in 1992, the first time that I remember the debt becoming a major issue in a presidential election. Along with this blog, I have a website on the subject at http://www.econdataus.com/budget.html. I have blogged further about my motivations for creating this blog and website at this link. Recently, I've been working on replicating studies such as the analysis at this link.

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