HILL: Should you be worried about tax reform?

U.S. Secretary of the Treasury Steven Mnuchin and Director of the National Economic Council Gary Cohn walk after meeting with Republican law makers about tax reform on Capitol Hill in Washington, U.S., September 12, 2017. REUTERS/Joshua Roberts

Not if you are one of the 103 million taxpayers who chooses the standard deduction instead of itemizing every deduction on your tax return each year.


Two thirds of all American taxpayers are in this group. The only thing they must worry about in tax reform is whether their tax rate is going up or down.


Chances are tax reform will not affect these 103 million taxpayers much one way or the other. Tax rates should go down for them when all is said and done based on comments from the Trump White House.


When they hear commentators bleating about “tax fairness” and “the rich paying their fair share of taxes,” they can and should watch football games, work in the yard, play with their kids or grandkids and get plenty of sleep this fall instead of worrying a whole lot about tax reform. 


One third of American taxpayers or 44 million households do, however, itemize their deductions on their tax returns. According to the Tax Foundation, “(o)nly 6.0 percent of tax returns with under $25,000 in income chose to itemize deductions in 2013. On the flip side, 93.5 percent of tax returns with over $200,000 in income were itemizers.”


Tax reform is very much a higher income’ concern to perhaps 20-25 million taxpayers then.


The question for higher-income taxpayers will be whether lower tax rates will offset the loss of some of the major tax deductions they have used to lower their tax liability over the years.


Why do we have tax deductions in the first place?


The income tax didn’t become a reality until the Civil War and was then promptly declared unconstitutional. Income taxes became “constitutional” in 1913 after ratification of the 16th Amendment. Class warfare almost immediately ensued as the highest tax rates exploded from 7 percent to 77 percent by 1918 to finance World War I to 94 percent during World War II. 


Tax deductions became very popular almost immediately simply because the top rate was so high. No one in their right mind was going to work in America and give 94 percent of it back to the government without a fight.


The tax deduction for employer-sponsored health plans started during World War II because of the wage-and-price freezes imposed by FDR. Providing health care coverage was a way to use the corporate tax code to offer fringe benefits such as health care to recruit and keep the best workers while deducting the “cost of doing business” by counting the cost of health care as a cost of labor.


The corporate tax deduction for health care accounts for the largest net loss of taxes ($235 billion) to the federal treasury of any tax deduction on the books today. It is also perhaps the safest deduction from elimination along with the mortgage interest deduction and the charitable deduction.


The one tax deduction that seems to be the most vulnerable is the deduction for state and local taxes paid. In a perverse way, this deduction effectively subsidizes high tax and spending policies in large states such as California and New York because it allows higher-income taxpayers a legal way to deduct those high state and local taxes which reduces their federal tax liability that would be used to fund federal programs for everyone, not just their states.


If learning about and understanding the inequities in the tax code today doesn’t make you want to throw your hands in the air and start praying for a consumption tax to replace it, nothing will.


Compressing the tax code to squeeze out as many deductions, exemptions and credits as humanly possible in return for lower rates across the board makes sense for all of us.