Everyone in Congress, as well as the president, has an idea of how tax reform should be tackled. The middle class is in the cross-hairs, as usual, for most of the tax reform being suggested. Among the minutia, there are three ideas on the table that are gaining serious traction.
- Mortgage interest deduction
- State and Local Tax deductions
- Pre-tax 401(k) retirement contribution deductions
Based on the fact that these are just suggestions, and all the details are yet to be known, the assumption is that the poor aren’t included. The middle class is an easy target and the wealthy have the means to make sure plenty of loop-holes are added for them to take advantage of.
Mortgage Interest Deduction
For most, the American dream is to own a home. The mortgage interest deduction has been a staple of our tax system for decades and is the reason that most Americans even consider buying a home in the first place. Basically the government is allowing you to live in your home interest free (on their dime obviously) if you buy a home less than $1 million in value. This deduction not only applies to your first home, but a second home if you’re lucky enough to be able to afford one. Eliminating this deduction would save the U.S. Treasury $64 billion this year. Even a slight change to this deduction that reduces the amount Americans could deduct could sour the entire market and make owning a home much less attractive.
State and Local Tax Deductions
While these deductions have the greatest impact for tax savings for areas with high state and local taxes, this is a standard deduction for most Americans across the country. These deductions soften the impact of property taxes and in some states, sales tax on large buy items. Americans have become accustomed to state and local tax deductions. The price we pay to live in a civilized society is taxation of assets both owned and purchased. Elimination of state and local tax deductions would save the U.S. government $69 billion this year. At what cost to the American people does the savings not justify a change?
Pre-tax 401(k) Retirement Contribution Deductions
This has been a target for several years by the government because the taxes on these accounts is deferred until the retiree actually retires and they are then taxed at a rate commensurate with retirement. This year alone, tax breaks and workplace defined-contribution plans will cost the U.S. government $102 billion. A figure that is projected to increase $44 billion by the year 2020. The proposed plan is to eliminate the pre-tax deduction or change it so that it’s impact to the U.S. government is significantly reduced. It’s a huge threat to the retirement system in that it ruins the incentive to save in the first place. Saving is already a major problem for most Americans that are used to living beyond their means over-inflating their spending power with credit.
A Trump administration, partnered with a dysfunctional Congress, could potentially hit every American with all three proposed ideas. That would have catastrophic ramifications to our fragile, yet, somewhat stable financial markets. It would cost all Americans more to own a home, live in the country and save for retirement. A change to any of the three would have negative effects no matter how small for those that don’t have the means to afford finding loopholes. Perhaps a silver lining here is that if the government chooses to change some or all of these, it could coincide with a lowering of overall tax rates and perhaps, a lowering of the marginal rate. It seems that regardless of the idea being proposed, the middle and upper-middle class seem to get hit going and coming. That has to stop if we’re ever to grow the middle class again.