The Money Chronicles, Volume 15. The Trump Chronicles, Volume 86: Let's Look at Tax Brackets

In my last post I spoke about President Trump’s promise to reform taxes by closing loopholes and make filing your taxes easier, perhaps even on a postcard.

But that part of tax reform matters only to those taxpayers who itemize. If you file a tax return you have the choice of taking the standard deduction or itemizing. Here’s my layman’s explanation: Your employer is required to send you a W2 form that shows how much money they paid you the previous year. That’s your gross income. You now have to choose whether to take the standard deduction or itemize your deductions.

Currently the standard deduction is $6,350 if you are married but filing separately from your spouse. It’s $12,700 if you and your spouse file jointly. If you’re single and head of your household it’s $9,350. You deduct this number from your gross income and it becomes a taxable income. According to the Tax Foundation, 68.5% of filers do this.

But if you’re in the early years of an expensive mortgage, if you donate lots of money to charities, or if you’re eligible for some of the countless other deductions, you may want to itemize. If these deductions total more than your standard deduction it makes sense to itemize. From the Tax Foundation 30.1% of taxpayers do this. OK, if you’re doing the math that leaves 1.6%. Those are taxpayers who don’t make enough money to pay anything in taxes.

This brings us to the end of part 1: determining your taxable income. Part 2 determines how much tax we pay on this income. But what percentage do we pay? When the government began collecting income taxes in 1913 it was determined that the wealthy would pay a higher percentage of their income than poor people: they created tax brackets. They specifically did not institute a flat tax (where everyone would pay the same percentage of income), arguing that those with higher incomes could afford to pay a higher percentage than those with lower incomes. From time to time politicians suggest a flat tax and I wrote about it in 2011.

Currently we have 7 tax brackets, and those in the highest bracket (39.6%) report a taxable income of $418,400 or higher. President Trump proposes only 3 brackets, and lowers the highest rate from 39.6% to 35%. And yet he claims this won’t benefit him or the rest of the 1%.

Simply put, it’s not true. In my last post I argued that his promise to close loopholes won’t happen and in this post I’m claiming that lowering the tax rate for the wealthiest will benefit only themselves.

More later.

The Trump Chronicles, Volume 85. The Money Chronicles, Volume 14: Let's Look At Tax Reform

While on the campaign trail President Trump spoke often about the need for tax reform. He promised lower our taxes.

From our earliest days we Americans have yearned for tax relief. Benjamin Franklin (1706-1790) is widely believed to claim that the only things we can’t avoid are death and taxes.

As a hospice chaplain I tell you how hard we try to avoid both. I’m not normally a fan of the “good old days” but there was a time when many Americans saw paying taxes as a form of patriotism. You can see a funny Donald Duck video from 1943 that tied taxes into support for World War II.

But the IRS 1040 form from 1943 was only 4 pages long. In fairness, the 1040 from 2016 is only 2 pages long, but the instruction book for the 1040 is 106 pages long. Clearly paying taxes has become much more complicated.

Republicans promise to reduce our tax returns to a postcard. But here’s the thing: it’s already easy if you don’t care how much you pay. Filing taxes requires to do two things: finding the difference between gross income and taxable income, and finding out how much we owe based on our taxable income.

Most of us (myself included) hire someone to do our taxes (and if you live in San Diego I strongly recommend Mark Young). But we need to hire someone to find the difference between gross income and taxable income. We can deduct from our gross income the money we spend on charitable donations, interest on home loans, and countless other things. Simply put, the government uses deductions to encourage certain behaviors. The government wants us to donate money, purchase homes, etc, and they encourage us to do these things by giving us a tax break.

But if you don’t care about this, all you need to do is declare your gross income as your taxable income. If you do this, all you need to do is look on a simple table to see how much you owe and pay it. This would take less than a minute.

And when politicians promise to “close loopholes” they are promising to eliminate deductions and make your gross income closer to your taxable income. But every loophole has a lobbyist whose salary depends on keeping that same deduction. Do you want to eliminate the home mortgage interest deduction? Good luck. You’ve declared war on the National Association of Realtors. Do you happily donate money to your local charity? Good luck. Expect pushback from your church, the Salvation Army, the Red Cross, the San Diego Blood Bank, and well, you get the point.

In fairness President Trump has promised to keep deductions for mortgage interest rates and charities. But look over your last tax return and see how many deductions you were able to take. If the only difference between your gross income and taxable income came from these two places, how much more is there? Are you willing to lose those deductions?

I don’t think so and I don’t think President Trump can pull this off.

There’s much more to this and I’ll be writing more. Stay tuned.