Wealth Transfer Ripoff for Taxpaying Workers

The GOP  ‘tax reform’ bill in the U.S. Congress purportedly contains a clause that will raise the standard tax deduction rate from $6,300 to around $12,200. That’s almost double. Don’t think this will save you a huge chunk of money!

Doubling the Standard Deduction

This supposed benefit will kill off self-employment and Social Security with one stone. But not in one year. Only after years of erosion will working people realize how they’ve been tricked.

Doubling the standard deduction on federal taxes paid by employed and self-employed people will raise the US government deficit too. Who is going to make up for the loss of tax revenues from increasing the standard deduction? Certainly not corporations and not the tiny number of individuals making large sums of money off of investments and real estate.

The Impact on Self-Employed Workers

This year – with regular standard deduction

Let’s say a self-employed professional, such as a freelance book editor, or a beautician or bookkeeper makes $35,000 net business income this year.

Currently, a self-employed person we’ll call Jan, would have to pay 12.4% of $35,000 for SE (self-employment tax). That comes to minus $4,340 SE tax.

Deduct $4,340 for SE tax from $35,000 and we get $30,660. This is Jan’s net business income which goes on Form 1040 as personal income from business.

The present standard deduction on personal income is $6,300. So we subtract $6,300 from $30,660 and Jan has $24,360 taxable personal  income.

Now subtract $4,500 for Jan’s individual personal exemption and Jan’s taxable income drops to $20,310

Jan’s $20,310 personal income is taxed at 15.3% and the government gets $3,107 in personal income tax from Jan. 

 Jan gets to keep $27,553 out of the $35,000 earned by the business ($30,660 after SE tax paid – $3,107 personal taxes)

Note: Self-employed persons pay twice as much SE tax as employees pay for FICA tax. Both taxes go toward Social Security and Medicare. (Employers pay for half of employees’ Social Security and Medicare taxes)

Self-employed people making under $127,200 a year of net business income must pay the full SE tax rate. However, the IRS does not levy income tax on the amount of earnings paid for SE tax. That would be double-taxation on the same money. Instead, self-employoed individuals get to deduct half of the SE tax from their net business income and half from their net personal income taxes.

Because self-employed pay the full SE tax, many self-employed persons will be far more negatively impacted by doubled standard deduction on personal taxes than employees. This bill will destroy many self-employed businesses.

This year – with doubled standard deduction

If the law passes (1) the self employed person will gain $902  and (2) the government will lose $902 of tax revenue. Here’s the math:

Jan’s business income after SE tax remains at $30,660 as in the case above and goes onto Form 1040 as personal income.

Now the double standard deduction is nearly double – it’s $12,200.

Subtract $12,200 from gross personal income of $30,660 and Jan’s total total taxable income is now $18,460.

Next we subtract the $4,050 personal invdividual exemption of $4,050 from $18,460 and get $14,410 taxable personal income.

Now Jan’s $14,410 is taxed by 15.3% and the government gets $2,205 instead of $3,107. The government loses $902 ($3,107 – $2,205)

Jan gets to keep $30,66o minus $2,205. Jan keeps $28,455 out of the $35,000 earned by the business.  Jan saves $902 ($28,455 – $27,553).

Sounds great for Jan? But how is he going to pay for health insurance? Jan might not qualify for the ACA subsidies if the ACA even exists next year. And if the ACA doesn’t exist, premiums will skyrocket to more more than Dale saves on taxes in the coming years.

How Social Security Dies from This ‘Benefit’

Later on in life when Jan goes to collect Social Security, his/her taxable personal income level has dropped from $20,310 to $14,410. This is a drop of 30% in the amount which will be used to determine how much Social Security is paid to Jan.

Over ten years, the minimum time needed to qualify for Social Security benefits, I’d guess that Jan would be lucky to retire with $600 a month Social Security! How will Jan live on that tiny amount in ten, twenty, or forty years from now?

Who is going to pay for the $902 the government lost from Jan for 2017 and beyond?  NOBODY!  – because all the rest of the tax cuts in this ‘tax reform’ are going to corporations and extremely wealthy people.

Yes, this is a wealth transfer, but it’s consequences for the government in loss of tax revenues from all workers will be in the billions. That loss of revenues will raise the deficit.

Individual income taxes are the government’s single biggest revenue source, (about 50%, far more than corporate taxes, about 10%).

The ultimate consequence of this tax break will be that workers who plan on living on Social Security in their future are looking at a life of poverty in old age when (if) they retire.

For self-employed and employed workers alike, the doubled standard tax deduction, if implemented, will be nothing but a “bait and switch” tactic designed to destroy Social Security. Get a small amount back each year and lose hundreds of dollars every month when you retire.

Read on for more regressive things this “tax reform’ plans to do to us:

Letter from My Congressman

Dear Nancy:

Thank you for contacting me regarding the Republicans’ tax plan. I appreciate you taking the time to share your thoughts with me on this important issue.

Republican Leadership just jammed a highly-partisan, sweeping tax bill through the House of Representatives without regard for its impact on everyday Americans. While the plan provides tax giveaways and loopholes to corporations and the ultra-rich, it destroys key tax benefits for middle class Americans, including:

• Dismantling the State and Local Tax Deduction – unfair double tax on middle class families, driving down home values, and endangering local governments’ ability to fund law enforcement, schools, and health services. This change will affect the more than 44.7% of Contra Costa households that claimed an average of 20,000 in state and local tax deductions in 2015.

• Eliminates Student Loan Interest Deduction and Lifetime Learning Credits – destroying a key deduction for young graduates and workers getting the job training they need to succeed in the 21st century economy.

• Eliminates Medical Expense Deduction – terminating a key deduction that helps families with children with disabilities and long-term care needs.

• Imposes New Limit on Mortgage Interest Deduction – attacking the dream of middle class homeownership in communities across America.

• Setting Up to Dismantle Social Security and Medicare – the plan would add trillions of dollars to the deficit, which will lead to severe cuts to or eliminations of Social Security and Medicare for future generations.

In our part of California, we have a clear need for new investments to improve our transportation systems, ease traffic congestion, and expand our housing supply. Many of the deductions cut in this tax proposal are a key part of making life in our region economically attractive for many families. California already gives more in tax revenue than it receives, and to take money out of the pockets of hardworking families – many of whom greatly rely on their tax returns – is negligent and irresponsible.

Despite my vehement “No” vote, this bill passed on November 16, 2017 by a vote of 227 to 205. As Congress continues to discuss tax reform, please know that I will fight for sensible tax policies that help the American families that need it the most while recognizing the need for revenue to address our shared challenges as a nation.

Again, thank you for contacting me. If I may be of assistance to you in the future, please do not hesitate to contact my office.

Sincerely, Mark DeSaulnier Member of Congress