Trump’s Middle Class Tax Cut: Really?

“The Main Purpose Of The Trump Tax Cut Is For The Middle Class”  Paul Ryan

In today’s political landscape is this statement reality or pure spin?

  • House Speaker Paul Ryan  on CBS Morning News in response to a question from host Charlie Rose.

Pythagoras urges objectivity and to examine  evidence before drawing conclusions.  The backdrop for  Ryan’s statement involves two constituencies.  The first is the so called Trump Base.  These are  people who put Trump in office and who steadfastly support him.  The make up of the Trump base is a topic for another blog but  the majority is from the middle class.  Pythagoras speculates this base to be larger than thought.  According to a June Gallop poll of this year, 62% of Americans identify as “middle class.”   Therefore, the Trump Administration and the Republican party must consider them in any tax cut proposal.

The second are the wealthy investors who bankroll the Republican party and the campaigns of its elected members, and who make up Wall Street and the financial sector.  They are salivating over the prospects of a hefty tax cut.  The Trump bump in the stalk market and its continuing rise seems primarily due  to the anticipation of a tax cut.  The trick is to appeal to both sectors of the population when their separate interests and goals are often antagonistic.

One strategy is to quietly give the wealthy investors what they want while  loudly proclaiming a tax plan whose raison-detre is to benefit the middle class (see above).   Using the political strategy of bait and switch, the middle class actually would get very little benefit while the top 1%  the lion’s share.  This must be done under cover of heavy bombardment by mystifying jargon and misleading mumbo-jumbo that the middle class simply won’t understand or  feel in their pocketbook until too late when the blame will be spread everywhere.   Let’s see how this will all play out, Ryan style.

Who Are the Define Middle Class?

First let’s define Middle Class.  Clearly “middle” is a definition up for grabs.  Statistical middle is the median, that point at which 50% fall above and below it.  So, this could mean the middle quintile, the middle 20th percentile.  Pew Research Center a reliable source  defines middle class using income. For a family of three middle class income extends from two thirds to two times the median income of $55,775 in 2016, i.e., $48,960 – $140,000.

Work by Leslie Shapiro of the Washington Post considers the median income as a function of the number of family members.  For a single-member household the median income is $30,367; for a two-member household it is $65,627; for a three-person household it is $76,986; and for a four-person household it is $91036.  Shapiro then defines middle class income as ranging from the 30th percentile to the 80th, incorporating the middle 50%.  If you are in the 30th percentile essentially 30% of the population has an annual income below yours.  By Shapiro’s calculations middle class income ranges from $35,000 to $122,500 using, a statistical, 2.5 house members.  For the hypothetical household with 2.5 members the median income is $59,039.  This number seems to contrast with what Gary Cohn, Trump’s top economic advisor, calls the “typical middle class family” making $100,000 who will benefit greatly from the proposed tax plan!

Another middle class economic definition is wealth, your total assets which can go from being in debt to extreme assets.  Many place middle class within a range defined as being without debt but having no real assets up to assert of $401,000.

A third definition involves annual consumption in the middle fifth (quintile) of spending which extends from $38,200 to $49,000.  An Obama White House Task force on the Middle Class (2009) thought the Middle Class could be better defined by their aspirations.  This might include such things as owning a home, taking family vacations, health insurance and retirement security, and affording a college education for their children.  But using aspirations is quite variable depending on demographics such as where one lives, one’s age, ethnic background, education level, and so on.  For example, if you live in Beattyville, Ky the median income is $16,000.    In Palo Alto, Ca. it is a whopping $136,000.  There are sone complicated formulas combining these demographics but Pythagoras prefers to fall back on using  annual income to define middle class.

The Present Tax Scheme.   The All Important Seven Tax Brackets: Circa 2016

Tax rate   Taxable income bracket          Tax owed

10%          $0 to $9,325                          10% of taxable income

15%           $9,326 to $37,950                $932.50 plus 15% of the amount over $9,325 to $37950

25%           $37,950 to $91,900               $5,226.25 plus, 25% of the amount over $37,950

28%           $91,900 to $191,650             $18,713.75 plus 28% of the amount over $91,9000

33%           $191,650 to $416,700          $46,643.75 plus 33% of the amount over $416,700

35%           $416,7000 to $418,400         $120,910.25 plus 33% of the amount over $416,700

39.6%        $418,400 or more                 $121,505.25 plus 39.6% of the amount over $418,400

There are seven Federal tax income brackets seen in the left column above.  If you are in the 25% bracket it does not mean you pay 25% of all of your income.  It is graduated so you pay 10% on income up to $9,325 plus 15% of income up to $37,950 and then 25% of the rest of your income.  So, lets say you made $80,000.  You would pay $5,226.25 plus 25% of $80,000 – $37,950 = $42,050 which would be 0.25 times $42,050 or $10,512.5.  You would then owe $15,738.75 in Federal taxes.  This Federal tax is 20% of your total income.  But this is if you are filing as an individual.  If you file as “married filing jointly” this gets reduced to $11,477.25 or 14% of your income. If you file separately you can take what is called a “standard deduction” on your income of  $6350.  Or if you are married and file jointly you can deduct  $12,700.

You can also deduct $4,150 per household family member called the “personal exemption.”  For a family of four this is a hefty $16,600.  There is also the “child tax credit” (CTC) of $1,000 per child which is subtracted at the end from your final tax bill.  This brings your adjusted gross income down to $50,700. From this figure you figure as above to determine the final tax bill from which you can then deduct the CTC of $1,000 per child.  If a household earns the median of $59,000 with two children then the final tax bill would be $1,458.

You may have multiple income sources.  Some of these may be taxed at different rates than others.  If you own stock the interest and dividends earned may be taxed at a different rate than your salary.   All of this gets boiled down to what is called your gross adjusted income.  This figure can be affected by what are known as itemized deductions.  Under the right circumstances these can reduce your gross adjusted income considerably.  For example, you can deduct the interest you pay on your mortgage, moving expenses getting to your new job destination, student loans interest, and if beyond a certain limit, your medical expenses.  You can also surprisingly deduct your state and local taxes in states where state income is collected.

These itemized deductions generally are modest adjustments to the gross adjusted income for most middle income families. Since you can deduct $6350 or $12,700 filing as single member household or filing jointly as married, most people don’t bother itemizing.  But for multinational corporations, big domestic businesses, and very wealthy individuals the deductions can be astonishingly large.  Clever lawyers or accountants can often get the gross adjusted income  down to where they end up paying little in Federal tax.  Most of these esoteric deductions are known by their rightful name as loopholes.  These are specially worded deductions that are included into the tax code as the result of high dollar lobbying and quid pro quo backroom deals to which the average taxpayer is oblivious.

There are currently three main sources of revenue for the Federal government: individual income tax, payroll tax, and so called corporate tax.  Corporate tax is levied on the adjusted profit of a business.  The tax rate for most businesses is 35%.  It doesn’t take a genius to imaging the esoteric nature of corporate tax.  Fortunes are made by corporate tax lawyers finding ways to save their corporations money.

While the tax rate for businesses in America is nominally 35%, most businesses are now “pass through” businesses.  This means, to site one example,  that a limited partnership financial firm takes their earnings and passes them to the partners according to some agreed upon formula.  While these earnings are ostensibly now taxed at a higher rate if they exceeds $418,400, at 39.6%, in reality the individual pays far less when all of the deductions are factored in.   Moreover, a large share of the income of many limited partnerships is portfolio income—long term capital gains—which is taxed only at a top rate of 23.8 percent. While much of the capital gain income flowing through partnerships is simply a return on capital investments, some portion for various financial institutions may represent  ‘carried interest’ that general partners receive in compensation for so-called “investment services.”  “Carried interest,”  based on 20 percent on the profits above a baseline of 8%,  means the partners receive a 20 percent commission in addition to any profit on other assets of the limited partnership. Both the profits on personal assets and carried interest are taxed at a  capital gains rate, which for high-income earners is 20 percent.

Read more: Carried Interest: A Loophole in America’s Tax Code | Investopedia

I think you are beginning to get the point that the tax laws in the United States are arbitrarily slanted in favor of the wealthy at the expense of the hapless middle class worker who can afford neither lobbyists or tax lawyers.

Payroll taxes come out of your paycheck for things like social security and medicare.  Look at your paycheck and you can see that payroll taxes take a real bit out of your income.

But the rich  are always looking to get richer and one way this can happen is to pay less in taxes.  They can do this is several ways.  One way is to continue the process outlined above by simply gaming the current system which they have the resources to do.  It’s expensive enough for the average middle class working person to pay a tax preparer like a CPA or H. and R. Block to fill out their forms.  Or to purchase an expensive computer assisted tax preparation program

Another recourse for the wealthy is to get tax laws passed that mandate lower tax rates for themselves.  This is accompanied by proposing some rationale that seems reasonable and  beneficial to all.  In Pythagoras’ next blog he will outline how the Republicans are proposing to cut taxes.  It is a fascinating story in deception.  But given the high financial stakes imposed by the wealthy, Pythagoras predicts despite initial difficulties it will pass.










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