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Thursday, November 2, 2017

The Problems With The Tax Bill

We got most of the details of the GOP tax proposal this morning.  For the most part, it looks okay, but there are some items that seem problematical to me.

First, the elimination of the medical deduction is a mistake.  Right now, one can deduct medical expenses if they exceed 10% of one's adjusted gross income.  For someone with income of 80,000 dollars, that means the deduction only starts once total medical expenses exceed $8,000.  If you happen to have high medical expenses like soaring health insurance premiums, this deductibility is very important.  For example, if the person with the $80,000 income is married and 62 years old, the health insurance premiums for the couple could easily exceed $8000 in many states.  There is no subsidy available for people with income that high, but the tax deduction helped a bit to make the payments bearable.  Under the proposal, that goes away. The family in question, however, does get a higher standard deduction, so some in this position will be ok.  Even more important is the effect on people with catastrophic medical expenses.  Suppose someone requires long term nursing or a home health aide.  These are deductible expenses right now (above the 10%).  For example, if an elderly person needs a home health aide to stay in his or her home, the cost could easily hit $75,000 per year or much higher.  Medicare pays none of that cost.  Long term care policies also don't cover much of the cost, and most people don't have such insurance.  A retired person with a pension, Social Security and reasonable savings could afford to have home healthcare for much longer if the medical deduction stays.  The effect of getting rid of such a deduction will just mean that more elderly patients will end up in nursing homes on Medicaid.  People who could have remained at home will be forced out.  Costs incurred by the Medicaid program will soar.  It's not a good result.

Second, the $10,000 limitation on property tax deductions is too low and too narrow.  Many people rent their homes but pay substantial state income tax.  The deduction ought to be for income or property taxes in order to be fair.  Also, the ten thousand dollar limit is much too low.  At one point, the rumored cut off was $40,000.  That would be much fairer.  In a high tax state like New York, the average suburban home pays taxes of more than $25,000.  These are not mansions, but rather just ordinary suburban homes.  Add income tax to that and you quickly get way over $40,000.  Look, someone earning a million dollars per year who lives in Connecticut will pay $70,000 in state income tax and something like another $25,000 for home property taxes.  These are the people who will pay the cost of reducing this deduction.  Someone who is middle income, however, ought not get hit here. 

Third, the end of the estate tax is another mistake.  The plan doubles the exemption so that estates up to more than $10 million will not get hit.  For a married couple, that means that estates up to $20million will not get hit.  The estates above that level belong only to the super rich.  We are way beyond family farms or small businesses here.  There is a valid societal purpose in taxing huge estates.  It is not good to have inherited wealth go on forever.  We do not need an aristocracy in this country.  Besides, if a 5 billion dollar estate gets reduced to 3 billion for the heirs, they will still have more than enough to live on.  So long as the exemption remains indexed to inflation, the tax will stay at an appropriate level.

The items above are things that need to be changed.  If this means that the corporate tax rate goes to 23% rather than 20%, that will be fine.  It would still cut the corporate rate by one-third and provide a major boost to the economy. 

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