The United States has a problem with income inequality. People have different ideas about
why this is happening. CEO pay climbs every single year without exception. The United States has lost 5 million manufacturing jobs since the year 2000. big shifts that’s happened in the economy that is lead in part to a decline in union membership. But one if the biggest drivers of inequality is hiding here, in these 2,000 pages. It’s the US tax code. President Trump and Republicans in Congress have a plan to alter that code. and if they get their way it’ll get even better for the richest Americans. First let’s look at a few things that Trump and the Republicans don’t want to change about the tax code. the charitable deduction and
the mortgage interest deduction. Here’s how they favor the rich: Let’s say Dan makes $100 donation to his church.
He makes about $30,000 a year. Roughly, the median income for individuals in the US. Which puts him in the 15% tax bracket. It means he would save at most $15 on his taxes. But let’s say Dan’s boss Steve makes the same donation to his church. Steve makes $500,000 a year which puts him in the top tax bracket. And the same $100 donation could save Steve $39.60 on his taxes. Dan and Steve give the same amount to their church but Steve saves more than twice as much. Small examples like this add up. People making $100,000 or more account for about 57% of all the charitable contributions in the US but they get 76% of the tax benefits. This deduction is also really expensive. The US spends $70,000,000,000 a year on it. More than eight times what it spends on Head Start the federally funded preschool program and more than twice what it spends on Pell grants for low-income students to go to college. Plus there’s all kinds of ways to bend the rules. Billionaire Mitchell Rales gets tax break for donating his collection of modern art to a museum that he built right next door to his house. A museum that’s only open for private tours. But the worst thing about about the charitable deduction? There’s not great evidence that it works. Turns out you don’t need a tax break to
encourage people to be generous to others. In the 1980’s the top tax rate
for the richest people was 70% and through a series of reforms it dropped to 28% and the Council on Foundations, it’s kind of a trade group for charities, said, ‘Oh my God, you do that we’re going to lose all our contributions.’ Guess what? No difference. People gave just as much with a much lower tax rate. Austria, Finland, Ireland, Italy, Sweden, Switzerland, and New Zealand have all gotten rid of their deductions for charitable contributions and that hasn’t had an impact on
donation rates. One easy way to make things more fair? Replace the tax deduction with a tax credit. If Dan and Steve both give $100 to their church, give them each a $15 tax credit. That’s how they do it in Canada. A tax credit reduces the amount you owe, so the same donation gets the same benefit no matter how rich you are. There’s another tax deduction that’s a boon for the wealthy. The mortgage interest deduction costs about $100,000,000,000 a year to the Treasury. We could use that money to treat wounded veterans, to build hospitals, to build highways but instead we give it to rich homeowners. Here’s how it works: Let’s say Dan buys a house for $100,000.
He doesn’t pay for that all at once. Each month he writes a check to the bank for $1,000. Let’s say $800 goes to paying for the house, and the bank keeps $200. That’s interest! Dan writes twelve of these checks a year, so he pays $2,400 a year in interest. The mortgage interest deduction let’s Dan subtract that interest from his taxable income which could save him as much as $362. “Nice,” thinks Dan, that is until he hears about Steve. Steve also buys a house for $100,000. He also writes a $1,000 check each month paying $200 in interest. So after a year, Steve can also deduct the $2,400 from his taxable income. But that same deduction can save Steve more than $960. Nearly three times as much as Dan for the exact same mortgage payments. It doesn’t stop there. Steve can buy a second home, deduct the interest, and save even more. Or he can get a mortgage for his yacht, count it as a second home, and deduct the interest. Sorry Dan, your fishing boat doesn’t count. There are deductions everywhere. The money you lose from gambling? Deduct it. Fancy business dinners? Yep. Money you put in a retirement account? That too. You can even deduct the fees you pay an accountant to help you find more deductions. And while theoretically Dan could take advantage of these same deductions the fact is, people like Steve benefit a whole lot more. People who make about $400,000 a year or more make up about 5% of taxpayers but they get more than half the benefits from these tax deductions. Now there’s a third part of the tax code that Trump and the Republicans want to keep and it’s even better for the richest Americans than all of these deductions The preferred rate for capital gains. Here’s how it works: According to the US tax code, there are two different kinds of income. Earned income is when you go to work and somebody pays you a salary or wage a paycheck. That’s earned income and we have a whole set of income tax rates for that income that go up to 39.6%. This is where Dan and Steve’s tax rates come from. Unearned income means guys who trade paper. Guys who sell stock or buy commodities and then sell it. Invest in real estate properties and then sell them. That’s capital income and we tax that at a lower rate. Let’s say Steve earns $500,000 a year as a surgeon and Laurie earns the same amount as a hedge fund manager. Even though their income is the same, Steve’s tax rate is 39.6% but Laurie’s tax rate is nearly half that, 23.8%. So Steve ends up with a much higher tax bill. This is why billionaire investor Warren Buffet pays a lower tax rate than his secretary. His money comes from capital gains while hers comes from a salary. Debbie works just as hard as I do and she pays at twice the rate I pay. Ronald Reagan thought the same thing. Reagan had been a very high, high bracket taxpayer. In fact, he paid at the 90% rate in the 1950s. He was a movie star. His accountant kept telling him well sign these documents and that’ll shift your income from labor to capital income and Reagan saw that that was hokey. Why should that be? Reagan’s landmark 1986 tax bill tax capital income and labor income at the same rate. People said, “Oh my God, you can’t do that. Then nobody will invest. Investments will plummet.” This chart shows the value of the S&P 500, a stock market metric that measures how well big businesses are doing. After Reagan raised the capital gains rate in 1986, businesses continued to prosper. Reagan’s successors, George H.W. Bush and Bill Clinton also raise taxes and the on the wealthiest Americans. And the 1990s saw America’s longest period of consecutive economic growth ever. But the changes that Donald Trump and Republicans in Congress want to make to the tax code look very different. While the Trump and GOP plans get rid of some deductions neither gets rid of the charitable
contribution or mortgage interest deductions Both plans would lower taxes on capital income for people like Laurie the hedge fund manager. And both plans would reduce the number of tax brackets from seven to three. and cut the top tax rate. Which would mean big tax savings for someone like Steve and minimal savings for working and middle-class people like Dan. Rather than working to reduce the growing gap between the richest Americans and everyone else these new tax plans would make that gap even wider.