Tax Reform: Lies, Damn Lies, and Statistics

With conflicting bills in the House and Senate, conflicting news coverage and conflicting claims regarding the impact of the respective tax reform bills, it is challenging to determine the net impact of the proposed tax bills. Many of the articles I have read make contradicting arguments that are well supported by facts and statistics.  I cannot help but think of the old Benjamin Disraeli adage "there are three kinds of lies: lies, damn lies and statistics" when trying to sort through analysis of the tax bills.

My personal opinion on the matter is that that both proposed bills are very complex and affect a large heterogeneous population making it nearly impossible to determine the net impact of any of the proposed changes to the tax code. Also, since different rules apply to different groups, it is impossible for either bill to have a uniform impact on every taxpayer. 

Below I have cherry picked a few examples to demonstrate that both sides of the argument can be true depending on how the argument is framed.  Please feel free to add more examples or critiques to my arguments in the comments.

The proposed tax cuts are actually a tax cut

Support: The authors of the respective bills have created several hypothetical taxpayer cohorts who will have their 2018 bill reduced compared to 2017. 

Refute: The CBO reports that neither proposed bill will balance the budget and will increase the deficit and overall national debt. Thus, the bills actually are a tax deferral that will have to be repaid by future tax increases. Also, some taxpayer cohorts will actually have their personal tax bills for 2018 increase.

Proposed tax cuts help wealthy taxpayers 

Support: According to the Tax Policy Center research group, 45% of Americans paid zero federal income tax in 2015. While I am willing to concede that there are probably a few high earners in that group, the majority consists of low income earners.  So any additional reductions to marginal tax rates would disproportionately help the top 55% of taxpayers that actually pay federal income taxes.

Refute: According to the same  Tax Policy Center research group, elimination of the state and local tax deduction would increase tax liability for 88% of households with incomes of over $1 million by an average of approximately $46,000 per household.  This creates a scenario where some taxpayers will pay higher tax bills despite having lower marginal tax rates.

Changes to mortgage interest deduction will damage housing sector

Support: A Brookings Institute research paper reports that 26% of US taxpayers (35 million) took advantage of the mortgage interest deduction in 2009.  So if all other conditions are held constant, this group could see their tax bill go up with the elimination of the mortgage interest deduction.

Refute: Home ownership rates in Canada (69%) and UK (71%) are higher than in the US (60-63%) despite not having a mortgage interest deduction.  The additional $12,600 in standard deduction would more than offset mortgage interest deductions for all mortgages below $307,000 (assuming 4.1% rate on a 30 year amortization). 

Proposed bills are simpler than the existing tax code

Support: The proposed GOP House Bill will reduce the number of personal tax brackets from 7 to 4. According to multiple sources, it is also expected to reduce the number of filers who itemize their deductions from 30% to approximately 6%.

Refute: The GOP house bill is reported to be almost 500 pages long and still contains a large number of loopholes. Also take a look at the calculation for tax treatment of small business in this Washington Post article. This is definitely more complicated than the 25% rate for all that is being reported.