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Monday, May 13, 2019

ANALYSIS/OPINION:

The Democrats who opposed President Donald Trump’s tax law, and their allies in the media, have taken to saying it didn’t really cut anybody’s taxes. Democratic frontrunner Joe Biden said the other day to a crowd that, “There’s a $2 trillion tax cut last year. Did you feel it? Did you get anything from it? Of course not. Of course not.”

Now that it’s been a month since Tax Day, it’s time to do away with all the smoke and mirrors, and actually look at the real numbers. One thing you might notice is that since the final numbers came in, the media quickly moved onto President Trump’s tax returns and suddenly are silent on how the tax plan actually affected the rest of us.


Let’s start with how much people actually paid in taxes. This is not what was taken out of their paychecks through withholding, but what was taken out of their paychecks minus what they received in a refund, or plus what they had to pay extra. This is their actual tax bill — forget about withholdings and refunds for a bit.

Remember this number: 25 percent. While the final IRS figures are still trickling out, H&R Block reported that the average tax bill for their clients — more than 20 million middle class Americans — was down by that amount. Yes, the average American paid 25% less in taxes this past year. That sounds like a tax cut.

But what about those refunds? Here’s where we have to do some simple arithmetic. The amount withheld from a paycheck is an estimate of a person’s actual tax bill. Essentially, it’s a pre-payment that gets finalized a year later. Some people under-withhold and have to write a check to the IRS on April 15. Others over-withhold and get a refund. The amount withheld is a personal choice.

Realize, that in a perfect world, the amount withheld would be exactly the amount of the actual taxes owed the tax bill. People who have to write a check on April 15 have essentially received an interest-free loan from the government for the year. And folks who get refunds have taken home smaller paychecks than they had to, and let the government hold that extra cash — like a savings account — only without earning any interest.

This year, the average refund is hardly changed. It’s actually up by about 1 percent for people who filed in both 2018 and 2017, but that’s not really any difference at all. So, to recap, people’s tax bills dropped by 25 percent and they got the same amount back in refunds. That sounds like a pretty decent deal for the average American.

But wait. Haven’t we heard that on average nationwide that may be true, but the wonderful people living in states like New York, California and New Jersey where state and local taxes are some of the highest — saw giant tax increases? After all, the new tax law limited the deduction for those taxes to $10,000 for everyone, and a lot of folks living in high tax states pay more than that.

Let’s have a look. Yes, it’s true that in those high tax states the average refunds were down on the order of about 6 percent. Not a big deal, still a change from last year. But what about their actual tax bills? It turns out they got the same reduction that everyone else got — about 25 percent — and that’s because the new tax law also did away with the alternative minimum tax. A lot of those folks never could deduct their state and local taxes in the past because of the AMT, but now without it, they get the full $10,000 deduction.

So, the new tax law didn’t increase people’s taxes — it reduced them, and by a lot. It also didn’t affect their refunds — it actually increased them by a small amount. And finally, all the hoopla over the unfairness of the tax law to primarily Democratic high-tax states (interesting correlation) turns out to be just that — hoopla.

• Kevin Cochrane teaches business and economics at Colorado Mesa University, and is a visiting professor of economics at The University of International Relations in Beijing.


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