Friday, October 6, 2017

The Major Hidden Tax Increase in the Trump Tax Reform Plan That Will Hit Lower- and Middle-Income Taxpayers

The sketch of a tax plan released last week by President Trump and the congressional Republican leadership quietly includes one provision that could raise taxes on many middle-income households by changing the way the tax code is indexed for inflation, writes Howard Gleckman of the Tax Policy Center.

The adjustment is technical and obscure but it would result in people paying higher income taxes than
under current law.

Gleckman explains:
 For years, the tax code had a structural problem known as “bracket creep.” In effect, as people’s incomes rose, in part due to inflation, they’d move into higher tax brackets. Even though their real incomes didn’t rise, they pay higher taxes. To avoid the problem, Congress changed the law so the IRS now adjusts the brackets each year to reflect inflation. For example, in 2016 a single person paid a 25 percent rate on taxable income between $37,650 and $91,150. In 2017, the 25 bracket doesn’t begin until taxable income reaches $37,950 and it runs up to $91,900.

With current inflation so low, the one-year change is modest. But over time, thanks to the magic of compounding, even small annual changes add up. And if inflation rises to something closer to historical levels, the effects would be even more significant....

Last week’s Republican plan would make two big changes in this inflation-adjusted world. First, it would repeal the personal exemption, which is indexed for inflation, and partially replace it with a bigger Child Tax Credit, which currently is not. While the higher CTC would help many families today, inflation would erode the additional benefit over time.

More importantly, the outline would revise the way the tax code measures inflation. Today, it uses the Consumer Price Index for urban consumers (the CPI-U), a measure the government nearly always uses to adjust for price changes. The GOP framework would shift to an index known as chained CPI (C-CPI)....

[T]the bottom line is that chained CPI  is consistently lower than traditional CPI-U...

 [I]t would...raise taxes for many since those indexed provisions of the Tax Code would be less generous over time than under today’s methodology.

And that means people would pay higher income taxes than under current law. It would especially hit low- and moderate-income households that rely on the EITC and standard deduction, but it would affect all taxpayers in some way.
Did I mention the tax cut is a scam?


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