6 Ways The Proposed Tax Plan Hurts Everybody (Except The Wealthy) - Forbes

NOV 26, 2017

6 Ways The Proposed Tax Plan Hurts Everybody (Except The Wealthy)

Erik Sherman , CONTRIBUTOR

Opinions expressed by Forbes Contributors are their own.

As has been well-documented in many places, the tax cuts being passed off as "reform" will largely benefit the wealthiest in the country. According to Moody's Analytics, the big winners are those making more than $300,000 a year.

Within 10 years, half of the rest of the population according to the Tax Policy Center — including the already shrinking middle class — will find themselves paying more in taxes, mostly in the lowest-income groups.

Here are some of the tactics structured in the tax bills that will ensure this happens.

1. Chained CPI

The consumer product index, or CPI, is way of measuring how quickly the cost of living goes up for people. The metric affects many things, such as Social Security adjustments and the amounts tax brackets are adjusted. The version of the CPI used has been the CPI-W, or Consumer Price Index for Urban Wage Earners and Clerical Workers.

The tax legislation would switch to something called chained CPI. Under chained CPI, there are assumptions that, as prices grow, people find alternatives to keep their spending down, like not getting health insurance if the price of food or lodging grows. The measure counts in part on consumers lowering their standard of living to keep up with growing prices. Chained CPI increases up more slowly than CPI-W. The problem is that if price growth exceeds the growth of pay, the result is that people fall further behind.

Not only would Social Security payments, as one example, grow more slowly than today, but there are significant tax implications. According to the Tax Policy Center, "indexing tax brackets and other parameters to the slower-growing chained Consumer Price Index means that over time more income is subject to tax at higher rates." The standard deduction earned income tax credit would also grow more slowly, driving taxes up, including for the poorest. And the change becomes a stealth way to reduce federal poverty spending because poverty levels tied to chained CPI would artificially include fewer people over time.

2. Mortgage interest deduction

Most of the aggregate value of the deduction goes to better-off families: more than three-quarters of the benefits go to homeowners with annual incomes topping $100,000.

So, it is largely a subsidy for people who are better off, letting them build more wealth. Still, it has been available to many not in the top income brackets. Right now, according to an analysis by real estate information company Zillow, 44% of homes are valuable enough that married tax filers can benefit by itemizing deductions and taking the mortgage interest deduction. Under the House plan that drops to 12%; under the Senate's, it's 7%.

3. State and local income taxes

The so-called SALT deduction allows people to deduct the taxes they pay to state and local governments from their federally-taxed income so they aren't taxed on money paid in taxes.

That deduction disappears. The Tax Foundation estimates that six states — New York, New Jersey, California, Texas, Illinois, and Pennsylvania — gain more than half the total value of the deduction.

This is another deduction that favors the wealthier among us, with 88% of the benefit going to those making more than $100,000. That said, higher wages don't necessarily mean more elaborate lifestyles. If your family household income is above $100,000 and you live in an expensive and high-tax state with costlier real estate, you may be only able to afford a solidly middle-class life.