The new GOP tax bill

As I’m on the road, I’ve only read summaries.  Kevin Drum has an excellent post on how the distributional implications harm the blue states, follow-up here.  Scott Sumner says better than expected.  Kevin writes:

The Republican tax bill eliminates deductions for a bunch of odd things: tuition debt, mortgage interest, alimony, medical expenses, state and local taxes, gambling losses, tax prep expenses, moving expenses, and a few others.

Bravo!  I’m actually impressed, noting that many of these deductions are limited rather than eliminated as I understand matters.  Furthermore, in various embedded ways the plan discourages the itemizing of deductions, which in turn limits the value of remaining deductions for many taxpayers, but in a politically subtle way.  The bill even nips at the endowment income for well-off universities, though I don’t favor that change, as it may harm innovation.

The plan as a whole is a reckless expansion of the deficit, but if that is going to happen anyway this is one of the better ways to do it.  In fact, we should tax companies less and homes/land more.  Why?  First, for behavioral reasons homeowners are insufficiently diversified; the tax code should not encourage that.  Second, this bill will (modestly) lower land, home, and rental values in the fancy cities on the coasts, a net gain at least for non-itemizers perhaps (caveat: I don’t know everything that is in the bill).  Third, big, fancy homes on big plots of land are not that “green,” and furthermore residence size seems to bring a lot of hedonic adaptation.  Fourth, there are more likely increasing returns across companies than across expensive homes.  Fifth, American equities seem to bring a long-run return of 5-7% and real estate zero percent.  More of the former please!  Companies > homes.

I believe that with further examination I could find many ugly and stupid aspects of this bill, and many politically craven decisions.  And again, I don’t favor increasing the debt.  But holding the size of the debt constant, let’s face it — this is a step in the right direction.


>this is a step in the right direction.

Jesus, Ty. It only took you 22 disclaimers to admit Trump is right.

Baby steps, little man.

*Trump* is not right about anything. He couldn't explain the major provisions of this bill at gunpoint.

Several presidents were experts on tax policy. Hoover (native intelligence), then Nixon (Duke Law then big law), then Carter (a diligent and smart fellow).

Anyone who recalls Reagan's interviews discussing the 86 Act will not find much to criticize in Trump. Of course, if you have the goodthink capacity to recall that every Reagan speech was actually about Comrade Ogilvy, then Trump suffers by comparison.

Reagan was good on natural law issues (for example, he was good at framing, for genuinely good-hearted purposes, free access to abortion as the modern-day equivalent of legally protected slavery), and he had a deep animal cunning, after years in the nasty-person hellhole of old Hollywood, that enabled him to be good at foreign affairs, to the extent that understanding nasty people is a trait that makes one a good president on foreign affairs. But it is inconceivable to me that he could have had any real and accurate understanding of tax legislation. Tax law is very difficult, and, outside the basic controversies (tax the rich more or tax the middle class more: have a complicated system that nobody understands (good for the unconnected) or have a slightly less complicated system that only the really intelligent understand (bad for the unconnected) - those sorts of controversies)) - well, outside those basic philosophical issues, tax law and the crafting of tax legislation is, like casino gambling or modified-to-be-legal Ponzi schemes, generally the province of very very clever people, with degrees from a Top 14 law school, who want to make other, richer and also clever people, generally non-lawyers, but that is besides the point, even richer. Hoover understood tax law, and Carter, and Nixon. The rest of the crowd - not so much. Seriously, can you imagine going to Obama or one of the Bushes - just to stick with our three most recent non-disbarred ex-presidents - for advice on the most beneficial way, from a tax point of view, to accomplish a corporate restructuring? The question answers itself.

In a world where facts don't matter . . .

You resort to Logical Fallacy Number One: ad hominem. You attack the person not the facts, merits, weaknesses.

You mean you don't like his policies. Likley that is because read it in and the NY Times.

FYI I think I lose with the plan. The wife and I lose the personal exemptions, just under $8,000, and part of our property tax deduction, almost $5,000. High local taxes are local politicians'/school boards' bailiwicks, If our marginal rate and brackets are not adjusted, we pay more Federal income tax.

Still, Trump2020!

It was a huge effort with little result. They moved a few of the tax loopholes around but in general it isn't a decent reduction in taxes. Some will get to deduct a little more, some a little less but not much of a change to the worlds most complicated tax code. I think the child tax credit should be eliminated, in fact all "credits" should be eliminated. I also think a tax rate of 39% is simply encouraging the very productive to take their skills elsewhere. Just another opportunity lost.

Where do those 'very productive' go for lower taxes?

Why do Wall Street financiers live in high tax Manhattan instead of low tax South Dakota?

The answer is obvious. They might save some taxes by moving to South Dakota but their pre-tax income would crash.

You need to live in NYC in order to earn $600,000/year on Wall Street. If you move to South Dakota, the best job you could find might pay $100,000/year.

In the case of the US as a whole, we're just not going to see that many upper middle class professional flee the country if we raise their federal tax burden slightly by reducing the state and local tax deduction.

@Cooper: of course not. Also, I can't think of a legit country with noticeably lower taxes than the US. One where the 'very productive' would want to flock to.

"Where do those ‘very productive’ go for lower taxes?"

They move the company and headquarters to lower tax countries like Ireland and even Canada. They move manufacturing to China or other low labor cost countries.

@GWTW: so we raise taxes a bit on high income earners like lawyers, accountants, financial advisors, engineers, venture capitalists, doctors, architects, etc and they move to Canada? Where income taxes are higher?

The point is, income taxes in the US are very competitive, basically the lowest in the world for first world countries. And increasing them a bit won't make your doctor up and move to another country. I do think we should cut corporate taxes, which is most of what this bill is about.

"holding the size of the debt constant"

It's not clear to me that this is the relevant comparison. This is a plan which causally increases the debt, and it's not the outcome of a process intended to or committed to increasing the debt. Reporting suggests that a number of alternatives which would increase the debt less were considered and abandoned for other reasons.

Surely your lede is still "this plan is bad because it increases the debt, though one could imagine plans which similarly increased the debt in worse ways", rather than the reverse?

It's the relevant comparison for evaluating tax *reform*, i.e., what and how we tax, which is a separate question from how much we should tax. The comparison has exactly the same relevance as comparisons of "revenue neutral" reforms. Indeed, the difference between "adds to the debt" and "revenue neutral" is one of the level of taxation, not the form of taxation. Tyler is praising the tax reform while questioning the wisdom of a tax cut.

If one wants to criticize the tax *reform*, then one must make a case that more itemized deductions are better than a larger standard deduction, for example. If one's main objection to the bill is that it adds to the debt, then one should just argue for higher taxes (or less spending). It's precisely because one can replace itemized deductions with a standard deduction in a revenue neutral fashion, that it makes no sense to ask which one adds more to the debt. The choice between itemized vs standard doesn't impact debt.

" It’s precisely because one can replace itemized deductions with a standard deduction in a revenue neutral fashion, that it makes no sense to ask which one adds more to the debt. The choice between itemized vs standard doesn’t impact debt"

Well, this particular choice between itemized and standard deductions does impact debt, which seems like the correct lens through which to view it.

Obviously one can analyse the distributional consequences of a tax bill independent of it's net impact on revenue. But it's not clear that that analysis is the correct first response to a tax bill which alters both those things. Maybe you should analyse the consequences of the tax bill as a whole when offering a judgement on the tax bill.

"this particular choice between itemized and standard deductions does impact debt"

The point is that it doesn't. The choice to cut taxes is what impacts debt. If one wants to oppose the bill because it cuts taxes, that's fine. Tyler was saying the he likes the reform but not the tax cut, which is also fine. Surely, you are not suggesting that one can't say favorable things about reform if one is opposed to tax cuts.

"The plan as a whole is a reckless expansion of the deficit, but if that is going to happen anyway..."

My question is about this framing. This is not ceteris paribus analysis, it's a factual claim that we should take deficit increase as a political given, and then analyse how it's being done.

Honestly, if the bill does two things and you think one of them is good and the other is bad, then even "the bill does good things (setting aside the fact that it also does bad things)", isn't an optimal first response. But Tyler's analysis doesn't reach that level of equivocation. It's "the bill does good things, setting aside the bad things which would totally happen anyway". It seems reasonable to ask whether they would happen anyway...

But is the expansion of the debt really so big? If the estimate of $1.5 trillion added to the debt over 10 years is to be believed (I have no idea if it is), this is a pretty trivial expansion. US GDP in 2017 is about $19 trillion, so over 10 years we can expect a total GDP of $200 trillion in 2017 dollars.

In real dollars per capita, the federal government has been roughly setting new records for income for a while now. The debt is about spending growing even faster than revenue has grown. That doesn't indicate an issue with how much revenue is being collected.

You can't believe anyone is actually serious about reducing the national debt if they ignore the ever increasing levels of spending over time and just want to talk about tax levels instead. Revenue keeps going up, so the debt isn't revenue-caused.

I'd be willing to bet that if this plan passes substantially as proposed, in ten years federal government revenue per capita will have actually increased (not decreased) and that spending in constant dollars will have increased more than any serious economist is suggesting this plan might "add to the debt".

Also, aren't tax cuts zero net present value (NPV)? Every dollar of spending increases tax burden, either now or in the future, by one dollar (in present value terms). Tax cuts now, however, simply increase future taxes by an equivalent amount in present value. The tax reform aspects, if they decrease deadweight losses, are actually positive NPV in social welfare. So, it would seem that debt expansion from tax cuts to get positive NPV from tax reform is an overall positive NPV proposition. Government spending, with or without debt expansion, is what increases tax burden

Understood that debt from tax cuts might bring up "generational equity" issues. But, it would seem like the generational equity issues arising from the 83 trillion [] in unfunded Social Security and Medicare liabilities far dwarf anything related to the official government debt.

The vast majority of Americans have no wealth or a modest amount in their home equity. So this plan is good because it will take some money out of real estate and pump it into the stock market? Where are the vast majority of Americans going to get the liquidity to take advantage of this coming stock market boom? They don't have high enough incomes, and they'll no longer be able to borrow against their home equity. And they'll still have to pay rent. With less dispersed real estate ownership and greater concentration, landlords may even be able to hike up rents for these former homeowners. Maybe everyone can live off of taxpayers like George Mason University professors.

"Where are the vast majority of Americans going to get the liquidity to take advantage of this coming stock market boom? "

The vast majority of Americans A) don't itemize deductions, and B) don't own houses worth > $500,000 (let alone have more than $500,000 in mortgage debt). This proposal would have no effect at all on them.

The corporate tax changes reward killing jobs in the US.

Today, slashing labor costs only results in after tax gains in profit of $65 for ever $100 workers lose in income.

The new plan is to reward a $100 cut in employee income with $80 to share holders. Better yet, ship the jobs overseas and pocket $90 for every $100 reduction in costs.

Milton Friedman complained that with high Federal and State taxes on profits, fighting unions to cut $100 in labor costs resulted in at most $50 after taxes, and maybe only $40 plus unhappy workers. And non-union shops faced managers taking the easy way of hiring your workers because the IRS paid more than half the higher wage to get workers you trained.

He also complained the rising wages generated too much demand for consumer goods and too much growth in production capacity, too many workers hired and paid too much. Thus too much inflation, too high interest rates.

The vast majority of Americans also do not own a second house. So the people with mortgages>$500K and/or second houses are precisely the sort of people who could afford to put more money in stocks.

Real estate earns a zero percent real rate of return if you don't count imputed rent. How much would the S&P 500 earn if you didn't count the equivalent of imputed rent? Not much. (Dividends are only part of the imputed rent on a stock; buybacks and cash takeovers are the other sources of cash flow to the investor.)

It is not possible, in anything like an efficient market, for one asset to have a permanently preferred return over another asset with similar risk. Stocks and real estate have similar risk.

I didn't understand Tyler's comment there either.
I also wonder about the line about households being insufficiently diversified. What if homeowners already earn a premium for that? Should we also tax proprietorships more than public corporations for the same reason?
I'd actually love to see Tyler work through those sets of questions. On the zero return comment, though, I can't tell what he's talking about. Surely he's not ignoring rental value.

I want more material stuff in the economy, not more "taking pleasure in my home," which is where hedonic adaptation kicks in more strongly than average, see my other comment. I do believe there is an equity premium, also, and that is a common view. Not obviously the correct answer, but certainly a common and easy to divine position.

Right, taking resources away from households and concentrating it in corporate balance sheets and in the wealthy totally produces more material stuff in the economy. Just like it did for the Soviet command economy. It's like a command economy, but even better, because capitalism. Cash flush corporations don't just sit on piles of cash, spend the cash on politics and lobbying, spend it on Diversity Initiatives and hiring minorities - they use it to make more stuff and blow it on thinking up new ways to make more stuff. The wealthy totally don't try to spend it on things that we can't or don't produce more of, like land, exclusive real estate, fine art, jewelry, luxury cars, huge yachts, etc. The wealthy actually spend it on ways to produce more material stuff in the economy, so you know, other people can become better off and then they themselves can become relatively less wealthy and decline in social status. That's what the wealthy want - they want to become less wealthy and decline in social status.

That is all reasonable. I just found the "5-7% vs. zero" wording confusing. Certainly where the housing stock is priced well above replacement value because the stock is relatively fixed by local political obstacles, replacing other taxes with property and land taxes would have benefits, as long as that is the case.

I would sincerely be interested in seeing you walk through the "insufficient diversification" issue. Homeownership is biased by various taxes now. But, without those, ownership would provide benefits of control, but those benefits would be inevitably tied up with the cost of insufficient diversification. I can't quite work out whether a market failure is needed to justify taxing it, if it would create social value to tax it even without a market failure, or if taxing it is simply to make up for the other explicit and implicit tax subsidies.

I want people to produce or buy whatever they want, whether it is more material stuff in the economy, more non-material stuff (copies of Shakespeare's plays are effectively free), or more pleasure in the size and luxury of one's home. I'd rather not bias the tax system in favor or against any of these.

@Larry Siegel - seems TC disagrees with you, since 'more material stuff' could include a cure from cancer in a pill from Pfizer for example. I think TC makes the better case here. As for returns from real estate being less than the stock market, I think again he's right. I calculated our total returns since the late 1980s has been about 7%/yr for DC real estate, mostly rentals, which is gangbusters for real estate, but still less than the stock market during that time. I've been trying to get more stocks into my 1% family's asset mix to no avail; the few stocks they have are heavily concentrated in a few areas, like GE, Citibank (ugh) and some media stocks like Viacom, CBS.

It could include that, Ray. And it could also include ever-bigger TV's, and other tons of nice things that don't cure cancer, but that we buy because we enjoy having them. Nothing wrong with that, of course, but there is no real difference between "taking pleasure in my home," and enjoying watching a baseball game on a really nice TV.

I want more material stuff in the economy, not more “taking pleasure in my home,”

Why? What is the value of "stuff" if not to give pleasure?

You are making the mistake of assuming that that which cannot be easily quantified is without value.

I thought that as a self identified libertarian you would celebrate consumers making the choice to take pleasure in their home. :-)

Past performance of the stock market is no guarantee of future returns. Estimates of forward real returns from the stock market are not great. I am planning my retirement around an expectation of 2% per annum real return from here forward. Many households would get a more certain (and inflation proof) return by owning their homes.

Drums post explains how the bill harms the Blue states not the Red states.

Yes, it's a work of genius.

The bill, I mean. Punches all the right buttons.

Agreed. Brilliant.

Sure. Let's turn the whole country into Kansas and Oklahoma.

"Sure. Let’s turn the whole country into Kansas and Oklahoma."

They are not the cesspools you believe.

unemployment rate
Kansas 3.9%, Oklahoma 4.5%, New York 4.8%, California 5.1%

GDP growth rate 1st quarter 2017
Kansas -0.7%, Oklahoma 1.9%, New York 0.3%, California 0.1%

[Note that the negative growth in 2017 comes after Kansas started abandoning the Brownback tax cuts]

Oklahoma seems like a real role model, fantastic growth and lower unemployment

"Punches all the right buttons."

Yes, the GOP seems to have stumbled on a way to punish enemies and reward friends.

Bigger wealth transfers from upper middle class in blue States to the conservative rich in red taker States.

Note the blue States giving more to poor red taker States has been denied to the poor. Obamacare subsidies to working poor have been denied red State poor by the red State rich, harming red State middle class health care workers.

The GOP clearly resents the blue State central planning successespecially.

Low taxes do not at track the highly educated tech workers who value high cost education, R&D, etc funded by high taxes, plus the transportation systems funded by high taxes to make high density population centers around the knowledge centers possible.


It takes money to make money.

@mulp - not a bad analysis, as historically the red states made money off the federal government, via either mineral rights in the West, free land, defense contracts, etc.

Blue states government functions rather poorly, but they are home to our big coastal cities that generate a lot of wealth because of inherited institutions. Most of the middle class professional workers live in the suburbs and vote republican, but are overwhelmed by poor tax consuming brown people that were imported into the cities to give rich liberals more political power through crass cynical patronage systems.

Some of the poorest red states are from the old south and are full of black people, which is one of the big reasons they are poor. Or they are from the historically poor appalachian areas, but their voting republican is very recent and they used to be hard democrat (voted overwhelmingly for Bill Clinton). The states that flipped red for Trump are mostly in the middle of the pack on income, and much higher when you think about it on a PPP basis. The most red states are the lilly white upper midwest. They have high labor force participation and low poverty rates as well as good incomes and low cost of living. Some of them may get more federal money because of two senators per state regardless of population, but I wouldn't call their citizens irresponsible in any way.

One of the big reasons they are poor is that they are very poorly governed, and lots of the people there are poorly educated.

"very poorly governed"

Assertion without evidence.

"The most red states are the lilly white upper midwest."

That could only be North and South Dakota.


What's not Brilliant is that red state loons blame Trump and Ryan, not the local politicians and school boards that constantly raised local taxes to such high levels.

Right. And here "harms" is synonymous with "doesn't continue favoring". Drum notes many deductions such as the mortgage deduction, state and local tax deduction, and student loan interest deduction that are limited or eliminated and replaced with a larger standard deduction. So, everyone gets the same standard deduction regardless of how expensive their homes are. Previously, blue state residents received a larger deduction because their homes were worth more. Drum says this "harms" blue states, but it's more accurate to say that the previous system favored blue states. Maybe, there are other deductions that could also have been eliminated that red states currently use more than blue states? If not, then the charge that Republicans are "screwing" Democratic voters is wrong. If replacing itemized deductions with a larger standard deduction "harms" blue states, then that just means the previous tax code was filled with goodies that favored blue states.

Yeah, blue States paying even more than they get while red States take even more than they pay, yet the working poor in red States get even poorer is a real GOP win.

The corporate rate cuts make cutting labor costs even more rewarding for the rich in control of red State jobs with few opportunities.

Drum has yet to notice his demographic is the bourgeoisie. The cognitive dissonance is too great.

The returns to housing over the last 5 decades have been approx 2% real plus the value of using the home, so approx 5% to 7% on a real basis.

Re: "The plan as a whole is a reckless expansion of the deficit, but if that is going to happen anyway this is one of the better ways to do it."

So, it's a reckless expansion of the deficit.

Stop there and think about what you just said.

Nothing that follows makes sense.

Fill out the following form: If A is stupid, then....

If it's stupid, it's stupid.

OK, let's say I face two choices; no other option is possible. (1) A reckless expansion of the deficit and a substantial improvement in the fairness and efficiency of the tax system. (2) A reckless expansion of the deficit with no change in the tax system. Which do you choose?

Promoting labor cost cuts is a good thing because the only way to stop a recession is increased deficit funded welfare so the even poorer workers can buy what they produce?

Think about it.

You can make your customers poorer and more dependent on welfare and pocket $65 after taxes for cutting you worker paychecks by $100.

Or pocket $80 for every $100.

Which makes screwing your employees more rewarding, given they will make up part of their lost wages in deficit funded welfare and keep spending almost as much paying your now higher profits.

@Larry Siegel - the 'starve the beast' strategy popular in the early 1980s--which I'm not a fan of--argues for choice (1). "The worse, the better" (communist maxim).

"If you're going to commit suicide this is a good way to do it."

Can we all agree that this is not tax reform? Can we file taxes online in 5 minutes? If we are going to get rid of any deductions shouldn't we get rid of all deductions? Let's make the income tax zero while we are at it.

And unfortunately I am one of the 19million who will likely see their taxes increase.

One thing not touched on so far is what political effect this might have in the blue states. Right now, taxpayers don't object too much to high state and local property and income taxes because the federal government covers a big chunk of the bill -- especially for folks in the higher tax brackets. But if this were adopted, suddenly those state and local taxes would pinch a lot more. Might this result in blue staters becoming more fiscally conservative and interested in shrinking the size of their state and local governments?

Genius, pure genius. This is why.

Yes. From my perspective in the big blue state in the middle of flyover land, this is indeed genius.

My taxes will go up.

Why are blue state Democrats so opposed to eliminating that deduction? The people who benefit from that deduction the most are higher income, so why isn't soaking them "fair"? I guess they're just mean-spirited, greedy people.

"High income" is middle class in blue States.

Economies are zero sum. In blue States goods and services that are local cost far more than in red States in order to pay workers much higher incomes than in red States. For example, in blue States the food variety and selection is much greater with bigger markets and better educated workers paid more. Medical care is better and costs more because workers are paid more. Economies of scale and specialization make these systems more efficient, so a 50% higher price might result in a 100% higher wage and greater consumption.

The price and cost of housing is higher, but not the price of equivalent vehicles or consumer electronics.

Red State politics make the State economies more like China and Mexico exporting to richer blue States which then balance the trade deficit with "foriegn aid" welfare from blue to red States.

The red States trying to grab blue State jobs end up being higher tax purple States because blue State economy workers want the greater choice and quality that costs more, especially education, knowledge, transportation.

Thus Texas, the Research Triangle, Virginia. Red plus blue fighting each other mixing to purple.

Blue states are just states with lots of brown people where whites split their votes. There is no indication that whites living in the suburbs of these states, who pay most of the taxes, like that state of affairs. In an election where only whites voted even NY would be red.

Also, your cost of living is so high in these blue states because you imported lots of non-contributing brown people that take up space in the most valuable real estate. That's you own fault.

“Economies are zero sum”-where did you learn that, comrade?

"Why are blue state Democrats so opposed to eliminating that deduction?"

Because it affects them and their friends, nor "rich" people. They are not "rich" only evil people like Trump and the Waltons are rich.

You forgot to mention the KOCH BROTHERS. You must mention those devils every chance you get.

You forgot to mention GEORGE SOROS. You must mention that devil every chance you get.

This is really overstated. First off, even assuming full coverage at the top bracket, you could deduct 39.6 cents out of every dollar of state income taxes. You'd still be paying the other 60.4 cents. And in reality, basically no one would get that much of a break. Most high income people in high tax states are getting hit with the AMT and their itemized deductions are subject to the Pease limitation. AMT disallows state income tax deductions entirely, and the Pease limitation claws them back very quickly once you over the income thresholds (a little over $300k for married filing jointly).

This is really overstated. First off, even assuming full coverage at the top bracket, you could deduct 39.6 cents out of every dollar of state income taxes. You’d still be paying the other 60.4 cents

Yes. But not just state income taxes -- also property taxes and local income taxes. And you throw out those numbers like it's no big deal. But suppose your state and local tax burden right now is $20K nominal. Under current tax laws, you're effectively paying just $12K after tax deductions (except in cases of AMT). Under the proposed tax change, that bill would jump to the full $20K (a 66% increase). Would that kind of tax increase have no political effects within those states?

Again, the 39.6% situation is more theoretical than real. The AMT and Pease limitations severely blunt or eliminate the actual effect of the deduction. If you're paying $20k in state and local income taxes in a high tax state, then you've likely got an income somewhere between $200k-$250k. That puts you in the 28% federal bracket, so you're saving $5600 with full deductible and likely much less in the real world. Not a ton of money when your income is that high.

Yes but you end up paying a 28% rate under the AMT and a 39.6% rate under the new provisions. In my case as a California resident my taxes are going to go up considerably.
Corporate tax rates do need to come down. I am on the board of a company that just merged with a company in the UK. The headquarters was moved to to the UK because the effective rate in the UK was 20% and 44% in the US including state taxes. That resulted in an increase in value to our shareholders of over $3 billion and the transfer of $35 million dollars of high paying jobs to the UK.

adam makes some good points. It is not clear to me that your hypothetical taxpayer would be better off under current law. It depends very much on the individual circumstances. The new law has advantages and disadvantages:


Loss of deduction of existing state and local income taxes (and sales taxes, if you elected). But, as adam notes, if you are paying $20K in state and local income taxes, you are very likely a high income taxpayer and your existing deduction is likely reduced by Pease limits and also the AMT. To itemize you'll now need to exceed $24K (the new std deduction for married filing joint).

Your property tax deduction is limited to $10K (before $24K threshold).

Limit on interest for mortgage debt up to $500K versus $1.1 million (effective currently, with home equity loan). This lower limit only applies to new mortgages. Query: Will this discourage selling and trading up? It may work a bit like Prop 13 in California in this regard.

Bottom line: there will be far fewer people itemizing deductions. For individual taxpayers, this is a simplification.


New higher std deduction of $24K (exceeds old std deduction and personal exemptions by about $4K and without existing PEP limitation (currently on personal exemptions).

Benefits for any kids likely greater


No Pease limits

Modest rate reductions up to about $260K

If this bill passes, it will be interesting to see if some states shift some of the existing income tax burden to property taxes.

The realtor lobby is not likely very happy today, which doesn't bother me.

Of course not. The blue states are blue because they have fundamental beliefs about the role of the government, and they're not going to suddenly change those beliefs just because they're hurt at the margins

What is far more likely to happen, and which Tyler ought to consider in his analysis, is that they will seek tit-for-tat revenge against their perceived opponents in red states by pursuing tax policies that disadvantage "the other side" the next time they reach power. The corrosive effects of creating openly retributive tax policy in my opinion far outweigh the benefits of some minor reductions in credits and loopholes.

In a way the liimtation of state tax deduction for progressive richies is optimal. If rich Blue staters want and are willing to pay for more local and state services and also higher federal taxes, then let them have both and have it good and hard. The private/public basket has to be more optimally funded this way. Genius,

Funniest Bloomber Headline Ever (well in a long time):

The Tax Plan Could Hit the Country's Most Expensive Housing Markets
By Prashant Gopal , Joe Light , and Rob Urban

What coule be more unfair than "hitting" people who can afford to bid up supply restricted real estate, and who derive that ability largely through rent seeking and network effects?

If the tax plan actually lowers the property value in expensive housing markets -- a big if -- that has substantial positive benefits on those who would like to buy housing. Isn't "affordable housing" a good thing?

@Sandia - rent seeking is bad, but network effects, argued Krugman in his Nobel Prize winning work, are good. I thought the headline was funny because of the author's last name: Gopal --> Go, Pal, "Joe Light" (as in lightweight) and, for an article on housing, "Rob Urban" (as to steal from the urban dwellers)

DC lobbying is a network effect, and the area around DC is one of the richest in the country. Not a very positive network effect.

And tax deductions of course!

The way it attempts to move toward deficit neutrality isn't really about those deductions, but by lowering when the top tax bracket starts. Therefore, this is a big tax hike for most people in the 5% to 0.1%, because Republicans believe that cutting the AMT and the Estate tax are far better ideas.

It looks like I get a major tax hike in at least three directions, while Trump lowers his taxes. It's hard for me to be sympathetic.

Buyers already struggling to afford homes in pricey New York-area markets may think twice about purchases, said Jonathan Miller, president of appraiser Miller Samuel in New York.

"Lowering home prices will make homes less affordable, especially if the burden falls mainly on rich people," -- Bloomberg

These are people who have to work for their incomes and take out mortgages to buy real estate. Not rich people who can pay cash.

So I have to ask, exactly what sort of tax plan would Drum support?

Doubling the standard deduction is one of the simpler options for helping out ordinary, not rich Americans.

Removing tax breaks for people who possess things of value that most people cannot afford are pretty well targeted at Americans with more net wealth.

I mean seriously, what exactly does a tax cut have to do to be "fair" in Drum's world. It cannot give more benefit to the rich even though they pay an obscene percentage of the income tax and very large percentage of the total tax burden.

But if you are going to tax the rich more ... you cannot do so if they are rich Democrats. Or more aptly the rich who live in Democratic states as I seem to recall Trump doing well in high income/home price areas like Long Island and Staten Island.

I mean seriously, should the Democrats not enact carbon taxes because those disproportionately affect Republican States? Or should they keep agricultural subsidies merely because those are concentrated in Red territory?

A large swathe of Democratic policies from EPA rules to Defense policy have disproportionately hurt Red States, and this line of reasoning has basically been ignored and appears to be a large part of the reason why so many Democratic counties went over to Trump.

It is farcical tribalism like this "don't hurt our millionaires" that convinces people that Drum and his friends simply want to stick it to them. Not a peep was spoken for years when the shoe was on the other foot. Now when policy precisely goes after the tax breaks of the wealthy, you cannot abide any attack on your tribe.

The correct framing is that the SALT and MID favor rich blue states, so is it really fair to gave them?

This bill taxes the wrong rich people.

If politicians were smart ( I know) they would have ignored the personal tax provisions, which 95 percent of the public don't understand, including with the doubling of the standard exemption, which was a pretty good idea for just about all the lower middle class people who don't itemize deductions on their tax returns.

Instead they could have concentrated on leveling corporate taxes (ours are the highest among the developed countries) for funds held overseas. The result would have been SOME taxes collected on repatriation and, ideally, SOME corporate investment in this country.

But no. On my annual 3 minute CNN viewing this afternoon, Elizabeth Warren went on and on about how the tax bill was "giving" big corporations $3 trillion. I have little use for Trump myself, but even Obama favored this fix. Unfortunately the resistance has no shame.

We're collectively too ignorant and too blinkered by ideology to hold our political class to account and make it work together for the benefit of the country.

So, why are taxes on businesses generating much more tax revenue in Europe, Asia, etc....?

Simple, lowering the rate to 20% and eliminating the deduction for labor costs.

@JosieB - same as it ever was. If you read David Stockman's "Triumph [not Trump!] of Politics", you'll see in the early 1980s the Republicans plan was to do the opposite of whatever the Democrats wanted, no matter how reasonable. The Democrats argued we needed more taxes, which was a good thing in retrospect, while the Republicans relied on voodoo economics like supply side economics and tax cuts paying for themselves.

Why is eliminating deductions for tuition debt a good thing?

Because the educated are wealthier making these deductions regressive on balance, they put upward pressure on tuition, and subsidizing the (partial) removal of young people from the workforce to study (what are often) low value subjects is a bad use of their time and our money.

Right but the deduction currently has an income ceiling which eliminates much of the regressiveness. This is simply raising taxes on recent graduates who are the ones currently taking advantage.

Thiis is a knowing increase in the deficit, which will mean that in future years, or even this year, we will have threats of a government shut down because the same group that favors this increase in the deficit with the tax cut will threaten to shut down the government in the future because the deficit is growing by the amount projected by this action.

So, a modest proposal.

Automatically approve a budget unless it exceeds the projected deficits from the passage of a bill. So, if we cut taxes believing the deficit will be X in five years, then, unless the deficit exceeds that number, the budget gets approved automatically.

If you vote for it today, you are agreeing to it tomorrow.

Otherwise, you are a hypocrite.

Here's an even more modest proposal, stop assuming spending in real dollars per capita gets to rise automatically over time.

Looking at the continued massive increase of federal income tax revenues per capita over time, it should be tough for anyone to argue with a straight face that lack of income tax revenue has anything to do with the actual cause of federal government deficits. You can look at a simple chart of per capita spending over time and see that the real deficit/debt problem is that federal spending increases faster than revenue does. That's overspending, not a lack of revenue.


I'm still waiting for you to fund the $4 Trillion for the Iraq/Afghanistan project.

Nice use of the random number generator. But you just got embarrassed.

It's OK though, when you turn on your favorite Comcast or Viacom employee for your next bit of political news, I'm sure they'll tell you just how smart you are.

Bill Kilgore,

So sorry, was off by $1.4 Trillion:
"According to a Congressional Budget Office (CBO) report published in October 2007, the U.S. wars in Iraq and Afghanistan could cost taxpayers a total of $2.4 trillion by 2017 when counting the huge interest costs because combat is being financed with borrowed money." From Wiki

A Trillion here, a Trillion there...what does it matter, it was all for defense.

You must've missed the point I made about wanting to reign in the overspending and injected some stereotype you have about people you don't know on the Internet if you think your comment is a rebuttel.

Yes, the DOD is also overspending, as are somewhere between 95% and 100% of the rest of the federal government. Thanks for you agreement...

@Thomas Sewell, thanks nice graph with amounts adjusted to present value. Note the huge gradient increase when Reagan was in power to ramp up federal government spending ("borrow and spend"). Reagan's administration increased the size of the federal government per capita, compared to the 1970s, as is well known, and this chart shows it graphically.

Yep, in the 80s the Dems in congress essentially traded the higher spending they really wanted for the lower taxes the Reps really wanted.

There was a big jump in spending during most war times as well, including after 9/11, although the Bush tax cuts didn't do much more than return high revenues back closer to the longer-term increase trend line.

The post-Bush Obama years were pretty bad, with a massive spending increase ineffectively attempting to solve the economic woes which also killed revenue temporarily, resulting in the clearest offset.

The long term story has been tax more and spend way more (Dem control) or tax a little less and still spend more (GOP control). If you don't want ongoing increasing deficits, at some point you have to reign in the spending habit. The only level part in the spending chart is from The Republicans controlling the budget in Congress, with Clinton as President ensuring they didn't feel like they could just spend on everything under the sun the President suggested.

Bouncing the rubble.

"The plan as a whole is a reckless expansion of the deficit, but if that is going to happen anyway this is one of the better ways to do it. "

An absurd capitulation. But look at the responses, most of you actually revel in it.

Be honest with yourselves, how many of you hated on "Keynesians" who wanted debt when appropriate, in a Great Recession?

Probably Tyler included.

Yeah, most of the commenters here hated blowing up the debt to provide health care for Americans. But they were only mildly opposed to blowing up the debt to invade Iraq, and now they're totally fine with blowing it up to get rid of the estate tax.

If we're going to run up the debt, let's buy something good with it.

"Populism" man, what can you do. Doff cap, tug forelock, complain about "elites" and give their trust fund kids a b___ j__

This is pretty retarded, even for you.

Countercyclical fiscal policy makes no sense, since that’s how how economics works. The correct thing to do would be to ..wait how do I express this in a format that you’ll understand? A listicle? Voxsplainer? Tweet from Chief Elizabeth Warren ?

NGDP is determined by the central bank. NGDP can be expressed for all intents and purposes as “demand.” A crash in financial markets should be an automatic trigger to find the Walrasian equilibrium rate that clears. Shoveling money at interest groups is like...totally fun and stuff...and intersectional. But useless.

Can we get a filter for people who want to comment about economics ? I think a pop up that requires the solution to an econometric math problem that you can solve by hand would eliminate this idiocy. Or some advanced math, like junior year math major not PhD. Don’t prevent comments but have a flag for “this person is literally retarded.” Or dumb person math level: integration by parts or convolution. Something that flags people who are literally not worth listening to in anything involving numbers.

Liberals are going nuts about fake news, I’d love a disclaimer for “I’m a literal retard, I can’t do college math” attached to every internet post. Liberals would expect a huge win over global warming. I’d expect a huge win for facts. Seems like the internet could self censor for it.

The irony is rich here.

A man complaining about others not knowing economics starts by saying the central bank determines NGDP, says about 8 more incorrect things in the next paragraph, and then just makes up a conclusion aligned with his priors.

Rich. And pathetic.

"blowing it up to get rid of the estate tax"

Eliminate Commerce Dept. [except for Weather Bureau and Census] and you are revenue neutral.

While I understand that cutting taxes while naming "things that someone could possibly do in the future" to reduce spending is SOP

.. it is also bullshit.

".. it is also bullshit."

Sure but liberals now pretending to be deficit hawks is the same.

I am an independent who has remained consistent. So bullshit on that too.

My position in 2009 was that counter-cyclical spending made sense. It still does, from an economics standpoint and from that of prudent government.

Remember the biblical 7 fat cows and 7 skinny cows? This is hardly new.

What the right wing is demanding, when you sum over 2000-1017 is pro-cyclical debt. Borrow more in good times and less in bad. I guess "household accounting" strikes again.

Small states need their small discretionary budgets. The current volatility of government interest charges ( a 20%volatility on our 600 billion interest payment) is large, then the small discretionary items are potentially stretched out, delayed a bit, or reduced to make room for interest payments.

These are existential programs, they get funded or the small state senator has no reason to vote yes. If I am from Montana, with all 500,000 of its people, then likely my state depends on some BLM program, or a federal sponsored pipeline or a government defense contract. I am the senator of a large town, Billings, I represent the mayor and city council who control most of the state economy via a few federal programs.

Drums article was interesting until you realize that he chose to make it one sided.
Reduction in value of deductions of charitable giving will hurt red states significantly more.
I'm sure there are other less obvious examples.

A small point. I can't think of any bigger points. Drum's article was pure genius.

Quick search says deductions 'cost' per year : mortgage interest 70 billion and 60 billion for charity
soumds pretty similar to me

What's your basis for this claim? Looking at the link below shows that, yes, red states are in the top 10 on a percentage basis, but, to my eye California, New York, Florida and Texas account for 2/3 of the $60 billion you claim. That's a fairly blue to purple lean if you ask me.

Good link. thanks

You are right.... California totals more charitable giving than Wyoming in total, states with really big populations have more people that give.... but proportionally, it does seem red states would be most affected... with all of the top 7 being very strong red states.

All of the charts in Drums article are per capita or percent of people.. not total...

So the basis of my claim is now your link. :)

It used to be that households and firms were partners in the jargon of economists. Now economists are journalists and they have to get out their rankings of households versys furns in time demanded by the parlor.

Next, we will be told that we are insufficiently *diversified* between activity and complacency and government should step in.

I’m actually impressed, noting that many of these deductions are limited rather than eliminated as I understand matters.

The small money deductions (in terms of the total tax receipts) are all eliminated entirely. From your list "tuition debt, medical expenses, alimony, state and local income taxes, gambling losses, tax prep expenses, moving expenses, and a few others." State and local property taxes and mortgage interest, the big money ones that nearly everyone takes, are limited in a progressive manner.

The reason for alimony treatment is to flip things around; right now, someone paying alimony deducts it and the person receiving it is supposed to report it as income. Nearly everyone who pays its remembers to deduct it, but a lot of people who receive it don't report it. By removing the ability to deduct it and relieving the person who receives it from having to report it, statutorily the same amount of money is due the government but it will collect more due to less (intentional or unintentional) evasion.

"By removing the ability to deduct it and relieving the person who receives it from having to report it, statutorily the same amount of money is due the government but it will collect more due to less (intentional or unintentional) evasion."

Only if both parties have the same marginal rate, which is very unlikely.

Fair enough. I should say that the amount of taxable income is the same, but the marginal rates may be different.

My understanding is that the House is still developing the pay-fors, so it's premature to make an assessment of the bill at this point. But Cowen is correct that the bill "discourages the itemizing of deductions", primarily by doubling the standard deduction. However this bill turns out, what it reveals is that the Republicans have no more idea about how to reform the tax code than they know about how to reform Obamacare. In both cases it's the spaghetti method for determining policy: throw a bunch of ideas out there and see which ones stick. I suppose that Cowen, being the foodie that he is, approves the spaghetti method.

"though I don’t favor that change, as it may harm innovation"

You serious Clark? This is only private universities, and the only innovation that is happening at private universities are not the kind that are good for society. They are too busy inventing ways to complain about hard work and redistribute wealth to add much to the body of STEM scientific knowledge.

Mother Jones says: "Blue states aren’t getting screwed just because they’re bigger. They’re getting screwed because they have bigger shares of expensive housing, high wages, and educated residents."

So, is this the anit-rent seeking behavior TC was talking about?

People that were getting special favors in the tax code are getting them taken away. Why is this a bad thing again? Just because it was the coastal elites that used government to secure them, it is unfair for the rest of the country to use the results of an election to take them away?

Special favors?

They are available to everyone. If your state government is too stupid to take advantage whose fault is that?

Some people don't want to live in areas where they intentionally price out minorities, and then harm the government's ability to assist people in challenging circumstances while doing it.

Evidently, none of those people live in San Francisco or Manhattan. So it goes.

Manhattan has a smaller percentage of non-Hispanic whites (48%) than the country at large(62.6%). It has a slightly higher black population (12.9%) than the country (12.2%).

Apparently, if there is some sort of bizarre conspiracy to price out minorities (are you serious?) it's not working very well there.

This is hilarious and not the point.

Democrats should be going hog wild over ELIMINATING the mortgage deduction let alone reducing it. This is an ultra regressive tax. Spotlight is on and apparently progressiveness in tax reform is not important.

Also you’re either retarded or being facetious. This is ownership. Give us the stats on ownership in Manhattan. Hey, maybe you’re right and 52% of the housing is owned by black and Hispanics.

Blue states enact policies which make housing more expensive. That's the fault of local city planning boards who refuse to tolerate densification.

I see no reason to subsidize the bidding wars for excessively priced California real estate.

If you make the tax burden more painful, maybe voters in blue states will reconsider their support for high levels of state and local taxes alongside strict zoning regulations.

I see no reason to subsidize a lot of things. So what?

If blue state voters are happy with higher state taxes and the services that come wth them why is it your business?

Tyler’s take—wrong.
Corp tax code changes: great!
Individual tax code changes: needless and stupid.

I've been advocating raising the standard deduction while eliminating itemized deductions for years, so I'm fairly pleased. They could have gone further.

I don't credit Trump with this though, I credit Paul Ryan.

Sure, it simplifies some things, but it also makes other things much more complicated. Case in point is the absurd new pass-through provision that seems to have no purpose other than to drastically lower taxes for a certain rich person who happens to get his income through pass-through entities. This provision is going to become a huge wealth generator for tax lawyers and accountants using it as a loophole to transform wages into pass-through income. On the individual side, it gets rid of some deductions, but creates a bunch of new credits with complicated rules and phase-outs. Also, instead of eliminating a number of the deductions, it creates caps and phase-outs, which just make them even more complicated.

First, for behavioral reasons homeowners are insufficiently diversified; the tax code should not encourage that.

Well, I guess reducing the value of someone's house will increase diversification, in the sense that it will now be a smaller percentage of one's wealth. But it seems odd to claim that the homeowner is better off because, while net worth has decreased, the decrease is concentrated in a single asset, so he is really better off for beiing "more diversified."

Oh, and why should anyone be delighted that medical expenses are n longer deductible? Note that they are now deductible only above a threshold, so routine stuff isn't deducted. But if someone faces catastrophic expenses, in part due to Trump's gutting of the health insurance system, should that really not affect their tax bill?

I think the point is that it will discourage people from putting more of their savings into real estate by buying an expensive home. Not that the value of their homes will fall. Note that the phase-out grandfathers people with existing mortgages. It will only apply to future homebuyers.

The value of one's home is determined by what someone (i.e. "future homebuyers") will pay for it. This change clearly will cause the value of some homes to fall since it will negatively affect the buying power of prospective purchasers, although I'm sure it will be all that much.

True, but that's not the goal - the diversification is supposed to happen by discouraging people from buying expensive homes, not by causing home prices to fall.

It might also cause some buyers to put more cash into the purchase. Then it reduces diversification, because they have fewer other assets.

Further, the foregone earnings on the extra cash are effectively a tax deduction, so those who can't do that who are hurt more than those who can.

Tyler is really stretching to justify this legislation.

Replying to the Slav,

No the whole point is that people respond to incentives. Housing should not be the main investment of Americans. Both parties have pushed this for years for no reason and to the detriment of the economy and our society.

This posting and discussion makes me think that this bill is about rewarding allies and punishing the guys on the other side. That, of course, is the reason for seeking power in the first place. Abstract economic theories are fun, but they don't win elections.

Yes, as pointed out by others, the bill is genius.

Lets hope it passes though.

Sorry but Drum's post is so f****** stupid. Not intrinsically, but within the context of the anti-Trump narrative.

Now it' wrong to tax rich people because rich people tend to be RightThinking Democrats! REEEEE

Tyler - fun post.

Serious question: Is the effect of the proposed tax reforms on the debt artificially diminished due to sunsetting tax breaks? (a la W's sunsetting tax breaks that led to the fiscal cliff?) Related: What are the economic implications of such sunsetting tax breaks? Are they a net negative for social welfare, governance, the economy, etc.?

The average American homeowner moves every 7 years. Buying and selling a house costs about 6% of its value. That's a huge cost and erases much of the gains from home equity appreciation.

If we made Rent Vs Buy a more neutral decision, people who move frequently would be better off. That's going to make relocating for a job easier and improve American dynamism.

Average American homeowner? Or household? I would be surprised if people buy and sell their houses that much, partly for reasons you mention. Especially when averaged with seniors who live in a home for decades. Or maybe someone who owns a house but moves from rental to rental is counted?

I find the criticism that blue states will foot the bill to rather interesting considering how progressives have characterized "tax expenditures". Also, if blue states are going to be hit harder, does this mean red states are being soaked now? Overall kind of a bizarre argument.

The move to reduce itemizing is great. That is true tax simplification. It will save a lot of transaction costs.

It's also very simple to have an Alternative Minimum Tax.

How about that for simplicity.

You can do that on a postcard too.

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