The voices of Tax Policy Center's researchers and staff
An ambitious tax reform plan proposed by Sen. Mike Lee (R-UT) would provide generous new tax credits for families with children and repeal the Alternative Minimum Tax, while at the same time eliminating the standard deduction and nearly all itemized deductions. More than 60 percent of households would pay lower taxes than under current law but, as a result, the plan would increase the deficit by $2.4 trillion over the next decade, according to a new analysis by the Tax Policy Center.
In contrast to many other GOP tax reform plans, Lee’s—first offered last fall-- does not aim to sharply reduce marginal tax rates. He’d replace the current system with two brackets—15 percent and 35 percent. By eliminating the 10 percent bracket, he’d actually increase rates for many households, nearly all of whom would be paying at 15 percent. Others now paying at 28 percent would be taxed at the top rate of 35 percent. Indeed, many households would face higher effective marginal rates than under current law.
Lee’s goal is to cut taxes for families with kids. Thus, it is full of trade-offs. He’d eliminate the standard deduction and repeal Head of Household filing status—a step that would raise taxes on some single parents. He’d also end the personal exemption for taxpayers and their spouses, but retain the dependent exemption, create an additional child tax credit, and a new personal tax credit. A married couple with two kids could get a combined credit of as much as $11,000 ($4,000 from the personal credit, $2,000 from the existing CTC, and $5,000 from the new child credit).
The plan would retain preferential tax rates for capital gains. Nearly all deductions would be ended, except those for charitable giving and mortgage interest, which would be available for only the first $300,000 in mortgage debt. Since there would no longer be a standard deduction, the remaining subsidies would no longer be limited to today's itemizers.
TPC found the biggest winners under the Lee plan would be the highest income households. The top 0.1 percent would enjoy a 3.8 percent increase in their after-tax income while middle-income families would get a tax cut of about 2 percent. Singles, on average, would see their after-tax income rise by less than 1 percent, while incomes for joint filers would increase by 2.7 percent. Families with children would get a 3.4 percent tax cut on average, with the largest benefit going to upper middle-income households with kids.
While Lee takes an interesting approach to reform, adding $2.4 trillion to the debt over 10 years makes his idea a political non-starter. Could he retain the basic concept behind the bill—helping families with kids—without losing all that money?
He’s got some options: He could raise statutory rates, cut tax preferences more deeply, or scale back those very generous credits. He could also get there by subjecting more households to the top 35 percent rate. In his proposal, the bracket begins at $175,500 for couples filing jointly ($87,850 for singles) He could avoid adding to the deficit by beginning the 35 percent rate at $100,000 for joint filers ($50,000 for singles).
Give Lee credit for original thinking. He’s designed a tax plan aimed at achieving what he believes is an important social goal—having a family with kids. And he’s done it in a transparent way. His numbers don’t add up, but it is easy to see how they could. It is also worth comparing Lee’s effort with Dave Camp’s. While Camp borrowed some of Lee’s ideas, such as ending Head of Household status, he was trying to achieve a very different goal--simplifying the code without adding to the deficit or changing the share of taxes paid by different income groups.
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