There are a lot of things I don’t like in the House and the Senate tax bills. I haven’t been shy about them. Yet even I recognize that the parts of the bills that are bad economics may be politically necessary in order to get two of the most important features of the reform proposals:
a) A permanent reduction of the corporate tax rate to 20 percent from its current 35 percent and b) the reduction or elimination of the state and local tax deductions (SALT).
The corporate-tax-rate cut is the most pro-growth provision in the tax-reform bills. It will trigger economic growth and some wage increases, improve competitiveness, and reduce corporate malinvestment and tax avoidance. The elimination of SALT will simplify taxes by getting rid of a profound unfairness and distortion in our tax code.
While the House and the Senate bills have different approaches to tackling these issues, both chambers deserve some credit for sticking to their guns. This is particularly true for SALT (the Senate plan would eliminate SALT and the House plan would keep a limited property-tax deduction) considering the extreme pressure from special-interest groups. Besides, the president has made it clear that a 20 percent corporate tax rate is the highest he will accept.
This is why I was puzzled to hear yesterday that Senator Susan Collins (R., Maine) is now arguing that we should settle on a higher corporate tax rate and use the revenue from that to restore SALT. According to ABC News:
I also think the reduction in the business tax rate is too steep, and that we could go to 22 percent, and then use that money, which is about $200 billion, to restore the tax deduction for state and local property taxes. That would really help middle-income taxpayers.
What on earth is Senator Collins talking about? Middle-class earners aren’t the ones benefiting from SALT. As I wrote recently:
Data show that the lion’s share of the SALT flows to high-income taxpayers, who are most likely to itemize. According to the Tax Policy Center, “about 10 percent of tax filers with incomes less than $50,000 claimed the SALT deduction in 2014, compared with about 81 percent of tax filers with incomes exceeding $100,000.”
Brian Rield of the Manhattan Institute breaks it down further:
Wealthy families are four times more likely to utilize SALT than other families. Only 24 million of 125 million tax filers earning under $100,000 take the deduction, typically lowering their taxes by $1,000. By contrast, 20 million of the 25 million filers earning over $100,000 take the deduction and typically save $4,000 (and often much more), even accounting for the Alternative Minimum Tax.
In fact, half the savings accrue to the richest 5 percent of taxpayers — and in New York, half of the SALT savings go to families making over $500,000.
To see why, imagine state income taxes rising by $1,000 for each family. A wealthy family in the 40 percent bracket may deduct that $1,000 and see its federal taxes fall by $400 (subject to the AMT). A family in the 25 percent bracket receives a $250 federal income tax cut. The 70 percent of taxpayers who don’t itemize their income taxes — often middle and lower incomes — receive zero federal income tax relief.
Since the number of filers who itemize will drop significantly if the standard deduction is doubled, there will be fewer taxpayers claiming the deduction in the first place. In addition, a majority of those itemizing and claiming the deduction will benefit from lower marginal rates overall. To be sure, there will be some losers, but they are likely to be seriously high-income earners. Now you know me. I am not in favor of jacking up higher-income earners’ marginal tax rates to raise revenue in order to pay for counter-productive tax handouts.
I am not in favor of jacking up marginal rates, period. But I have no problem getting rid of unfair tax subsidies such as SALT that benefit those higher-income earners.
Is Senator Collins (along with many Democrats in New York and California) really ready to go to war to protect these taxpayers at the expense of some of the economic growth that would have been produced by lower corporate rates? Apparently, she is.