Are middle-class taxes going up under President Donald Trump? This tax season there seems to be a lot of confusion.
Owing More Doesn’t Mean Paying More
A widely circulated CNN article is being misinterpreted to claim that taxes up are in 2018. “The average refund is down about 8% under the first full year of the overhauled tax code, according to data released by the IRS on Friday. Refunds averaged $1,865 compared to $2,035 for tax year 2017,” reported Victoria Cavaliere.
A large source of the confusion seems to be coming from the fact that the percentage of income withheld from paychecks has decreased. Suppose for the sake of simplicity that someone earns $50,000 a year, pays 20% tax ($10,000 annually), and pays that tax in the form of $200 a week for a 50-week work-year. Since they pay exactly what’s owed, they would receive no refund. Now suppose the tax rate decreases to 18% (so $180 a week is owed), but because a smaller percentage of taxes are withheld, only $170 is actually paid. Thus, while that person had their taxes decrease by $100 overall, they would still end up owing $500 at the end of the year.
Or put simpler: people are receiving smaller refunds because they paid fewer taxes in the first place.
It’s doubtful that the average employee is paying attention to such a thing, so you can hardly fault some people for mistakingly believing their taxes went up. However, those economically inclined have known this since July 2018 when the Government Accountability Office released a report stating that 30 million taxpayers would end up owing money in 2019 due to insufficient withholding, a significant increase over the year prior. The percentage of employers that over-withheld employees taxes decreased from 76% to 73% from 2018-2019, and the percentage that underwithheld tax increased from 18% to 21%. Both groups are likely to see an increase in their taxes owed.
Bear in mind that we have a labor force of over 160 million people, so each percentage point change is equal to 1.6 million workers (or 9.6 million overall who experienced a change).
Rates Did Decline
The Trump tax cuts composed of both corporate tax reform (cutting the corporate tax rate from 35% to 21%), and across the board cuts to individual income tax brackets. Below is the percentage point decline for each bracket. Also note that $5,650 increase in the standard deduction. For someone in the 22% bracket, the value of the increase in the standard deduction comes out to about $1,243 in post-tax income.
|2018 Tax Rates – Standard Deduction $12,000||2017 Tax Rates – Standard Deduction $6,350|
|10%||0 to $9,525||10%||0 to $9,325|
|12% (-3%)||$9,525 to $38,700||15%||$9,325 to $37,950|
|$38,700 to $82,500||25%||$37,950 to $91,900|
|24% (-4%)||$82,500 to $157,500||28%||$91,900 to $191,650|
|32% (-1%)||$157,500 to $200,000||33%||$191,650 to $416,700|
|35%||$200,000 to $500,000||35%||$416,700 to $418,400|
|37% (-1.6%)||Over $500,000||39.60%||Over $418,400|
Before the Trump tax cuts, the bottom 80% of income earners paid roughly 33% of all federal income taxes, but received 35% of the benefits from the Trump tax cuts. The top 1% paid 27% of all federal taxes, and received only 21% of the tax cut, according to the center-left Tax Policy Center.
Who Could End Up Owing More?
There are exceptions, however, and those likely to actually be paying more this year are homeowners on coastal states, which tend to have higher property tax burdens (mainly stemming from higher housing prices in those states), and high state income taxes. The Trump Tax cuts capped state and local tax deductions (SALT) to $10,000 a year, so those who pay more than that some are losing out on deductions (which appears to be the case of Dennis, the second tweet quoted at the beginning of this article).
Prior to the Trump tax cuts, 77% of the benefits of SALT deductions went to those earning above $100,000, while only 6.6% went to those earning below $50,000 (who are unlikely to be affected by the SALT cap anyway, unless they’re paying over 20% of their incomes in state and local taxes).
While this is inflated by high-income earners, the average SALT deduction claimed nationwide in 2015 was $12,471, meaning the average person claiming is losing a $2,471 write-off. Assuming they fall in the 24% income bracket, the value of that write-off is approximately $593, which would be more than offset by declines in individual tax brackets. A 2016 Tax Policy Center study found that a complete elimination of SALT deduction would raise taxes on 88% of households earning over $1 million, raising the taxes of the average millionaire by $46,550.
Overall, the average taxpayer saw a $2,200 cut under the Trump tax plan, while 6 percent of households saw an increase of $2,800 (nearly all of which were concentrated in the top 10% of income earners).
While it is true that the Trump tax plan did raise taxes on some earners, there were roughly 10 people who saw a cut (most of whom were concentrated in the bottom 90% of income earners) for everyone who saw an increase (most of whom were in the top 10%). Admittedly, I’d have preferred if all brackets saw cuts, but liberals can hardly mischaracterize the Trump tax cuts as “tax cuts for the rich.”
SALT Changes Coming in 2019?
President Trump has publicly indicated that he’s open to increasing the $10,000 SALT cap to provide relief to middle class and upper-middle class families negatively affected. “There are some people from New York who have been speaking to me about doing something about that, about changing things. It’s been severe on them,” he said earlier in the month to The Stamford Advocate. While he didn’t elaborate on the extent to which the cap would be lifted, the move is likely to garner support from coastal Democrats if advanced further.