When Barack Obama was president, his default position on taxes was that the “rich” should pay more. According to President Obama, the rich needed to pay their fair share. He never said what percentage or amount equaled their fair share, but it was always more than they were paying at the time. And definitely more than the Republicans thought was right. Because the Republicans are all about tax cuts for the rich.
Well, with the new tax plan Donald Trump has presented, it looks like we have finally found both (i) a group of rich people that Democrats don’t think should pay more and (ii) a tax break for the rich that Democrats want to keep. The rich that Democrats don’t think should pay more are, of course, those who live in their states and the tax break Democrats want to keep is the deduction for state and local taxes.
The standard Democratic argument on tax deductions is that they benefit the rich. If your tax rate is 10%, a tax deduction only saves you a dime for each dollar of the deduction. But if your tax rate is 39.6%, that same deduction saves you almost 40 cents. Which means the rich are getting four times more benefit than the average person. Which Democrats think is unfair and a handout to the rich – except, apparently, in this case.
In fact, it’s worse than that. The Republican proposal also includes doubling the standard deduction, which means the state and local tax deduction would benefit almost only the rich. With a $24,000 standard deduction, middle class people wouldn’t be deducting their state and local taxes anymore. It will only be the really rich, especially those who live in states with really high state and local taxes, who will be benefitting from this deduction. But, apparently, as long as it is their rich who use this loophole, I mean deduction, it doesn’t seem to bother the Democrats.
The point is, of course, that allowing people to deduct state and local income and property taxes makes it easier for state and local governments to raise their taxes – and makes it easier for politicians in those states to raise taxes and still get re-elected. Consider, for example, California, New York, and Massachusetts. High tax states with lots of Democratic elected officials. Democrats in those states need the state and local tax deduction to keep their constituents from getting too upset. And Democrats in Congress are willing to fight for the tax loophole that helps them.
Plus, one side benefit. Under the present system, because states like Texas don’t have a state income tax (and have lower taxes in general), rich people in Texas are paying more in federal income tax than rich people with the same income in New York or California because rich people in Texas don’t have as many deductions. So not only does the deduction for state and local taxes make it easier for local Democratic politicians to raise taxes in places like California and New York, it also means rich people in Texas pay more federal income tax than rich people in those states. Which sounds like a win-win for Democrats in Washington – and definitely one to fight for.
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