How Tax Reform Will Put More Money in Your Wallet This Year

President Donald Trump on Dec. 22 signed the Tax Cuts and Jobs Act, and this sweeping reform of the U.S. federal tax system will mean significant tax cuts for most individuals, families, and businesses.

Because most workers have taxes withheld from their paychecks, these tax changes could have a big impact on take-home pay and household budgets.

Those changes to paychecks could come as soon as February, when the IRS is supposed to have new wage-withholding guidance available to businesses. Currently, however, the IRS has instructed employers to continue using the old, 2017 withholding tables.

Once the IRS releases its 2018 tables that incorporate the changes from the Tax Cuts and Jobs Act, most workers will see either larger paychecks, or little change in them.

Workers with children and those with moderate incomes will likely experience significant changes—increases—in the size of their paychecks.

A single individual earning the median wage of $50,000 a year can expect a $35 to $45 increase in their biweekly or semimonthly paycheck. That amounts to an additional $1,100 in take-home income per year.

A married couple with three children and $75,000 in income can expect an additional $65 to $75 in their combined biweekly or semimonthly paychecks, or close to $2,000 per year.

The primary source of higher paychecks will be the new tax law’s lower rates and higher child tax credit.

Lower Rates

The new tax law lowered marginal tax rates virtually across the board. That means the IRS will direct employers to withhold less of workers’ wages.

For example, income previously taxed at a 15 percent rate will now be taxed at a 12 percent rate, and much of the income that was previously taxed at a 25 percent rate will now be taxed at a 22 percent rate. Lower rates mean less money withheld and thus higher take-home pay.

Child Tax Credit

The doubling of the child tax credit, from $1,000 to $2,000, along with a higher phase-out level and a higher threshold for the refundable portion will translate to less tax withholding for workers with children.

Employees who receive the full benefit of the child tax credit can expect to receive about $40 more per child in each paycheck.

Of course, the new tax law does away with personal exemptions, which previously provided an additional per-child tax benefit ranging from $0 to a little more than $1,000 per child, depending on the taxpayer’s income level.

The near-doubling of the standard deduction, along with the increase in the phase-out and the refundability of the child tax credit will go a long way in making up for the loss of personal exemptions for most taxpayers. On net, the higher child tax credit will result in significant increases in workers’ take-home pay.

Pass-Through Income for Small Businesses

Workers with pass-through income from a small business or LLC can also expect to submit lower tax payments to the IRS.

The new tax bill provides a 20 percent deduction for certain pass-through income, and that income is also subject to the new, lower tax rates.

For a small business with $150,000 in annual income, the new tax law will likely translate to about $2,500 less in quarterly income tax payments to the federal government, or $10,000 less per year.

Retirees

Most retirees receive a large share of their income from fixed sources, such as Social Security, pensions, or 401(k) withdrawals.  Thus, they are unlikely to experience changes in their monthly income because of the tax bill.

Many retirees will, however, experience a change in their total tax bill. For most, that will be a positive change, meaning a lower total tax bill.

The new tax law will not affect either the level of Social Security or 401(k) payments and withdrawals or the taxation of those payments and withdrawals. It will, however, generally result in lower tax rates on income from earnings or pensions.

For many seniors, that will mean either lower quarterly tax payments to the IRS or income tax refunds when they file their 2018 taxes next year.

Higher Refunds in 2018

Since employers won’t receive the new tax-withholding tables until February, most workers will pay more in taxes than they owe during the first few weeks of the year. Consequently, tax refunds for 2018 (which will come in 2019 after workers file their 2018 taxes) will likely be larger than in future years when the correct withholding tables apply for the entire year.

Although not perfect, the Tax Cuts and Jobs Act will have significant, positive effects on the economy.

Some businesses have already responded to those anticipated changes by granting bonuses and wage increases and by making or planning for additional investments. Individuals, too, will soon see the benefits of tax reform by taking home bigger paychecks.

The vast majority of businesses and individuals will benefit, thanks to the Tax Cuts and Jobs Act.

The post How Tax Reform Will Put More Money in Your Wallet This Year appeared first on The Daily Signal.

In Updated Charts, What 8 Seniors’ Tax Bills Will Be With Tax Reform

The Tax Cuts and Jobs Act when signed into law will mean tax cuts for most Americans. Nevertheless, change—even good change—can bring about uncertainty.

Retirees may be the most concerned about what the new tax legislation will mean for them, as most rely on relatively fixed incomes.

But in fact, the Tax Cuts and Jobs Act is mostly good news for retirees. For the most part, they will be less affected than other Americans, as the changes do not affect the way Social Security and investment income are taxed.

Many retirees will in fact benefit from the tax bill’s doubling the size of the standard deduction.

While seniors’ earnings and pension income will be subject to new individual income tax brackets and rates, those changes will mean tax cuts—not increases—for an overwhelming majority of seniors and retirees.

There are three provisions in the new tax law that could particularly affect retirees.

  1. Medical Expenses Deduction

Currently, anyone who has high medical expenses can deduct the portion of those expenses that exceeds 10 percent of their income. So a couple who earns $40,000 in income and has $10,000 in medical expenses can deduct $6,000 of those expenses.

The Tax Cuts and Jobs Act increases the deductible amount to over 7.5 percent of income for 2017 and 2018. In the above example, this would mean a $7,000 deduction.

  1. Personal and Elderly Deductions

Currently, in addition to claiming a $4,050 personal exemption, people over 65 can also claim a $1,250 blind or elderly deduction. The Tax Cuts and Jobs Act maintains the blind and elderly deduction but eliminates the personal exemption and replaces it with a roughly doubled standard deduction.

  1. Other Itemized Deductions

Two of the deductions that have received the most attention are changes to state and local taxes and mortgage interest. The new tax legislation caps state and local tax deductions at $10,000.

For mortgage interest, the final legislation caps the mortgage interest deduction at $750,000, but only for new home purchases. These deductions tend to have less impact on retirees who often have no mortgage or are far enough along in their mortgage payments that they have little mortgage interest.

Retirees typically also have lower state and local income taxes because not all of their income is subject to taxation.

To illustrate just how the Tax Cuts and Jobs Act will affect different retirees, consider these five examples.

Evelyn Thompson

Evelyn is a retired waitress and a widow. She receives an average-level Social Security benefit of $16,000 per year, as well as $11,000 from her husband’s 401(k). She has $10,000 in medical expenses.

Evelyn’s tax bill will not change under the final legislation She does not pay anything under the current tax system, and she won’t pay anything under the new system because it does not change the taxation of Social Security benefits or investment income.

Moreover, the increased standard deduction means that if Evelyn were to receive or earn more income, more of it would not be taxable.

Phillip Olson

Phillip is a retired utility worker. He earned an average income throughout his career, but now receives a significant pension and even saved a little on his own through a 401(k).

His combined retirement income is $50,000 a year, consisting of $18,000 in Social Security benefits, a $28,000 pension, and $4,000 in 401(k) income. Phil has $7,500 in medical expenses, and he currently pays $3,988 in federal taxes.

Phil’s tax bill will go down by $572, or 14.4 percent under the final tax reform legislation (to $3,416).

Phil’s tax cut is primarily the result of lower marginal tax rates on his $28,000 in pension income. In addition, no changes will be made to the taxation of Phil’s $18,000 in Social Security benefits, or his $4,000 in 401(k) income.

Although Phil has $7,500 in medical expenses, the higher standard deduction makes it not worthwhile for him to deduct these expenses, meaning he will face less paperwork and a simpler tax-filing process.

Craig and Grace Graham

The Grahams are a middle-income retired couple with very high medical expenses. Craig was an electrician and Grace was a secretary.

Together, they receive $25,000 a year from Social Security and $50,000 from their 401(k) savings, making for a total income of $75,000. However, Craig’s health has deteriorated significantly and he had to enter a nursing home this year, which resulted in $50,000 in out-of-pocket medical costs.

Because all of their income comes from Social Security and investments—which the new tax legislation does not change—the Grahams’ tax bill will not change under the new Tax Cuts and Jobs Act. In each case, they owe nothing in federal income taxes.

Since the Grahams already owe no federal income taxes, they do not benefit from the new tax reform bill’s temporary increase (for 2017 and 2018) in the medical expenses deduction—from the current law’s amount exceeding 10 percent of income to the new legislation’s amount exceeding 7.5 percent of income.

Michael and Sarah Lee

The Lees are a semi-retired, upper-income couple. Michael was a writer and Sarah was an attorney, but both still do some contract work on the side.

The Lees have a combined income of $150,000 a year, consisting of $50,000 in earnings, $50,000 in Social Security benefits, and $50,000 in investment income from their 401(k)s. They have $15,000 in out-of-pocket medical expenses, and currently pay $15,613 in federal income taxes.

Under the new tax rates and rules, they will pay $2,059, or 13.2 percent less (their federal income tax bill would be $13,554).

The Lees’ taxable income declines slightly due to the higher allowance for medical expense deductions, but the main source of their tax cut is the tax legislation’s lower tax rates on their earned income.

Hector and Carmen Garcia

The Garcias are a wealthy retired couple. At one time, they jointly operated their own real estate development company, which they have since passed on to their children.

The Garcias have accumulated significant savings, and they receive $950,000 in investment income each year along with $50,000 in Social Security benefits. The Garcias make generous charitable donations of $100,000 a year, they have $25,000 in medical expenses, and they pay about $79,000 in state and local taxes.

Although the Garcias do not need all of their income to cover their own expenses, they enjoy using their wealth to help their children with their business ventures, to support some family members who live outside the U.S., and to contribute to each of their 10 grandchildren’s college accounts.

Under the current tax system, the Garcias pay $151,768 in federal income taxes. Under the new tax system, their taxes will increase by $12,149, or 8 percent (to $163,917).

This increase comes from a loss of all but $10,000 of their state and local tax deductions.

While the Garcias would lose these deductions, they would keep the full value of other deductions—such as for charitable donations and mortgage interest. That is because the Tax Cuts and Jobs Act eliminates the phase-out of itemized deductions that currently takes some (up to 80 percent) of their deductions.

Good Changes for Most Retirees

Understandably, many retirees may be concerned about how the new Tax Cuts and Jobs Act will affect them. But the bare facts of this new legislation should be reassuring: tax reform, for the vast majority of American seniors, is great news.

Moreover, although not represented in seniors’ individual income tax bills, the corporate and small business tax provisions contained in the new tax legislation  will benefit seniors both through their investment incomes and their purchases.

That’s because the benefits of lower corporate taxes flow to individuals who own stock in those corporations, workers who are employed by those corporations, and consumers who purchase goods and services from those corporations.

Once the Tax Cuts and Jobs Act has been signed into law, nearly all American seniors will be able to see that this bill is a win for them.

 

The post In Updated Charts, What 8 Seniors’ Tax Bills Will Be With Tax Reform appeared first on The Daily Signal.

How Big Is Your State’s Share of $6 Trillion in Unfunded Pension Liabilities?

Despite a solid year for investment returns, the unfunded liabilities of state and local government pension plans increased by $433 billion, the most recent estimate from the American Legislative Exchange Council shows.

According to ALEC’s report—which uses more appropriate assumptions on investment returns than the plans use themselves—state and local governments’ unfunded liabilities now exceed $6 trillion.

That’s a whopping $18,676 for every man, woman, and child, or nearly $50,000 for every household in America.

This is bad news for taxpayers in states and localities where government workers have been promised far more in pension benefits than politicians set aside to pay them. That’s because most states have strong protections for promised pension benefits, meaning there is little prospect of reducing a pension benefit or asking employees to contribute more to it.

Contractual or constitutional obligations for government pensions could mean that paying the pensions of retired government employees may take precedent over paychecks for current employees.

Moreover, some state constitutions prevent any changes to government employees’ pension benefits. That means current government employees can’t ever be required to contribute more to their pension plan than they did on the first day they were hired. And, actually, not a single term of their initially promised pension benefits ever may be altered.

Just imagine how detrimental it would be to private employers if they never were allowed to alter the benefits they initially offered their employees.

With an average funding ratio of only 33.7 percent across state and local pensions and every single state at risk of defaulting on pension obligations (as measured by Pension Protection Act standards, assuming a risk-free rate of return), taxpayers across all states face significant tax increases to pay for their governments’ unfunded pension promises.

Taxpayers in certain states are looking at greater risks and liabilities than others, however.

Taxpayers in Tennessee, Indiana, Nebraska, Wisconsin, and North Carolina, for example, must deal with the lowest unfunded liabilities per person, ranging from about $7,600 to $10,900.

Taxpayers in Alaska, Connecticut, Ohio, Illinois, and New Mexico, on the other hand, face the highest unfunded pension liabilities, ranging from about $28,100 to $45,700 per person.

 

Overall, the American Legislative Exchange Council estimates that pension plans have only about a third of the funds on hand—33.7 percent—that they need to pay promised benefits. Some states have significantly lower funding levels, which means they are at risk of running out of funds in the near future.

Once a state or local pension plan runs out of money, taxpayers have to fund the pension benefits of retirees as well as the contributions of current employees.

Connecticut, Kentucky, and Illinois have the lowest funding ratios, at 20 percent, 21 percent, and 23 percent respectively.

Already, Illinois spends as much on pensions as it does on welfare and public protection (that is, police and firefighters) combined, and nearly half of its education appropriations go toward teacher pensions. If the state’s pension plans reach insolvency, pensions could become its single biggest cost.

Some states have taken measures to improve the outlook for their pension plans, such as shifting new employees to defined contribution retirement plans, limiting future pension benefits, reducing unrealistic interest rate assumptions, and actually making the annually required pension contributions. But the rising tab for unfunded state and local pension liabilities shows most states have failed to address massive shortfalls.

One motivation for states not to address their pension shortfalls is the hope or expectation of a bailout by federal taxpayers. This would force taxpayers in more fiscally responsible states to pay for the financial recklessness of more spendthrift states.

Lawmakers in Washington need to send a strong signal to states that a federal pension bailout is not an option.

Rep. Brian Babin, R-Texas, has introduced a bill that would do just that. His legislation, called the State and Local Pensions Accountability and Security Act, would prohibit the U.S. Treasury and the Federal Reserve from providing any form of bailout or financial assistance to a state or local pension plan.

Unless state and local lawmakers know that a federal bailout is not an option, as Babin’s bill proposes, they will have little incentive to enact much-needed pension reforms now.

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In Updated Charts, How These 7 Taxpayers’ Bills Will Change If Tax Reform Is Signed Into Law

With lawmakers poised to pass the Tax Cuts and Jobs Act—a sweeping tax reform package—many individuals and families will see very different tax bills come 2018 and beyond. In general, an overwhelming majority of Americans’ will pay less in federal taxes.

So how will you fare under the GOP tax plan?

Well, on net, most Americans will see a significant tax cut, including virtually all lower- and middle-income workers and a majority of upper-income earners.

The Tax Cuts and Jobs Act will, on average, provide immediate tax cuts across all income groups, according to analysis from Congress’ Joint Committee on Taxation.

This analysis does not, however, show how those tax cuts would vary based on factors such as total income, type of income, number of children, and itemized deductions.

Among the new tax law’s most beneficial components is a significant reductions in business tax rates. This will help make America more competitive with the rest of the world, and will result in more and better jobs as well as higher incomes for American workers. The Act will also put more money back into the paychecks and pockets of most Americans.

The new tax law does lack some important pro-growth and simplification components, however. It does not go far enough in eliminating deductions and loopholes or in reducing the top marginal tax rate. It adds a discrepancy between the top rate for individual versus pass-through and small businesses and adds some complicated business provisions. It also fails to eliminate the Alternative Minimum Tax and it phases out and eliminates some tax cuts for budgetary reasons.

To get a better idea of how some workers, families, and small businesses will fare under the new tax code, The Heritage Foundation has estimated the tax bills of a range of taxpayers under current tax law and under the GOP’s final version of the Tax Cuts and Jobs Act.

Tom Wong: Single teacher with median earnings of $50,000 per year. Under the current tax code, Tom pays $5,474 each year in federal income taxes. His tax bill will decline by $1,104, or 20 percent, to $4,370 under the new law.

These tax cuts come primarily from a higher standard deduction of $12,000 and from lower marginal tax rates. Currently, Tom’s marginal tax rate is 25 percent. But under the new law, his tax rate will be 12 percent.

John and Sarah Jones: Married couple with three children, homeowners, and $75,000 in annual income. John is a sales representative and earns an average of $55,000 a year. Sarah is a registered nurse. After having children, Sarah cut back to part-time work and she earns $20,000 a year. Under the current tax code, John and Sarah pay $1,753 each year in federal income taxes.

But under the new tax law, their tax bill will decline by $2,014, or 115 percent, (to $0, plus a refundable credit of $261).

Even though John and Sarah would have more taxable income under the proposed plans (as a result of not being able to claim personal exemptions), they would still receive a tax cut because they would face lower marginal tax rates and receive larger child tax credits.

Their current marginal tax rate will decline from 15 percent to 12 percent, while their $3,000 in total child tax credits will double to $6,000.

The numbers listed in the above example for John and Sarah’s current tax payments assumes John and Sarah own a home and live in a state with average tax levels. Under the current tax code, if they did not own a home but instead rented, their federal tax bill would be higher ($2,375 instead of their current $1,753 tax bill).

This would mean that their subsequent tax cuts—as renters—would be larger—$2,636, or 111 percent. The Tax Cuts and Jobs Act partially limits—by placing a $10,000 cap on state and local tax deductions—an inequity in the current tax code that provides bigger tax breaks to property owners, wealthy individuals, and people who live in high-tax states.

Under the new tax law, however, John and Sarah’s tax bill will be the same regardless of whether they own a home or rent because the larger standard deduction will mean they will not itemize in either case.

Peter and Paige Smith: Married couple with two children, homeowners, $1.5 million annual income. Peter works for a technology startup company and Paige is an accountant. Although Peter’s income fluctuates significantly from year-to-year, this was a big year for his company and he received a very large bonus, bringing his total earnings to $1.4 million. Paige’s stable income of $100,000 provided their family the financial stability they needed for Peter to take a risk and follow his dreams.

Under the current tax code, Pater and Paige pay $439,275 in federal income taxes. Their tax bill will decline slightly, by just $2,431, or 0.6 percent,  to $436,8344 under the new tax law.

Peter and Paige’s taxable income will be higher under the new law because they will lose most of their state and local tax deductions. Their total exemptions and child tax credits will remain the same—at zero—as their income is too high to claim any exemptions or credits under the current code or the proposed plans. They will face a lower marginal tax rate, however.

Under the current tax code, Peter and Paige face a top marginal tax rate of 40.5 percent (39.6 percent, plus the 0.9 percent Obamacare surtax). Under the new tax law, their marginal rate will fall to 37.9 percent (37 percent, plus the 0.9 percent Obamacare tax).

Those marginal tax rates do not include Social Security’s 12.4 percent and Medicare’s 2.9 percent payroll taxes, which can lead to extremely high combined marginal tax rates for second earners that are part of a high-income family like Peter and Paige. Because Paige makes less than Social Security current taxable maximum income of $128,400 (for 2018), her combined federal income and payroll tax rate is 55.8 percent under current law and will fall to 53.2 percent under the new law.

Although Peter and Paige will have about $100,000 more taxable income under the new law because they can only deduct up to $10,000 of their state and local taxes, their lower top marginal tax rate will help eliminate some of the existing tax penalty they face on work and investment.

The above example assumes Peter and Paige live in a state with average taxes. Currently, however, their federal tax bill could be tens of thousands of dollars higher or lower, depending on whether they live in a state with higher- or lower-than-average taxes for them to write off. This is not the case under the new tax law because it caps state and local tax deductions at $10,000 (and at their income level, they would likely claim that full amount in any state).

Jose and Marie Fernandez: Married couple with two children, owners of JM Blinds and Shades LLC, homeowners, $250,000 annual income. Jose owns and manages JM Blinds and Shades manufacturing company. Marie primarily stays home with their young children, but she also helps out significantly with the business when needed. Under the current tax code, Jose and Marie pay $35,588, which is their alternative minimum tax (AMT) amount.

The AMT is a separate tax system, created back in 1982 to make sure that millionaires paid their “fair share” in taxes. However, because the AMT was not indexed for inflation until 30 years after it was enacted, it now hits a significant number of middle- to upper-income Americans with a higher tax bill than they would otherwise pay. That’s because under the current tax code, taxpayers pay the larger of what they owe under the regular income tax system and the AMT.

The new tax law increases the exemption level for the AMT, and significantly raises the income level at which the phase-out of that exemption begins (the phase-out creates a phantom, 35 percent marginal rate in addition to the AMT’s stated 26 and 28 percent rates.

Jose and Marie will still pay the AMT under the new tax law, but their AMT tax bill will decline by $13,619 or 38 percent to $21,969 under the new law.

Although the AMT is a separate tax system that does not include the new 20 percent deduction on small and pass-through business income, Jose and Marie still benefit—indirectly—from the deduction. Without the deduction, Jose and Marie would pay $32,039 in federal income taxes under the new law—a smaller cut of $3,549 or 10 percent. However, the deduction for their small-business income lowers their regular income tax bill under the new law to a level ($20,384) that is below their new AMT tax bill ($21,969). Thus, while they still pay the AMT (which does not provide the small business deduction), Jose and Marie would pay much more in federal income taxes without the deduction.

Jose and Marie’s marginal income tax rate is 35 percent under current law and will decline to 28 percent under the new law. The 28 percent is their AMT marginal rate (absent the AMT, their new marginal rate under the standard income tax would be 19.2 percent, which is 24 percent minus the 20 percent deduction).

Under current law, Jose and Marie make too much to claim the $1,000 per child tax credits. Under the new law, however, they will receive the now-doubled $2,000 per child tax credits.

The above examples seek to show how some common taxpayers—including some wealthy individuals who are less common—would fare under the proposed tax reforms. Actual individuals’, families’, and businesses’ tax bills could vary significantly.

On net, however, most taxpayers—particularly lower- and middle-income taxpayers and businesses—will pay less in total taxes. Even more important than total taxes paid, however, is marginal tax rates. That’s because a lot of decisions are made at the margin.

For example, a worker is far more likely to work an additional hour if it counts as overtime and provides the equivalent of 1.5 hours’ worth of pay. And an individual is more likely to make a $1,000 contribution to his retirement savings account if that savings goes tax-free and means he can put all $1,000 away, instead of first having to pay between $100 and $400 in taxes on the savings.

Lower marginal tax rates are a big driver of economic growth, and the lower the rates, the higher the growth. The new tax law reduces the top marginal tax rate by 2.6 percentage points for individuals, and by as much as 10 percentage points for small and pass-through businesses.

While the proposed tax reforms do not achieve 100 percent of the potential pro-growth impacts that they could, they go a long way in helping to jump-start America’s struggling economy and put it on a pathway toward higher long-term growth. This leaves tax reform an unfinished business. The expiration and phase-out of some of the tax cuts in this plan will provide the opportunity for Congress to enact more of the pro-growth components lawmakers left out of this tax package.

 

 

 

The post In Updated Charts, How These 7 Taxpayers’ Bills Will Change If Tax Reform Is Signed Into Law appeared first on The Daily Signal.

Liberal Lawmakers Trying to Bail Out Private Pensions With Taxpayer Money

Last year, liberal lawmakers wanted to bail out the United Mine Workers of America’s pension plan to the tune of roughly $6 billion.

This year, they’re at it again, except on a larger scale. Under pressure from a few very large and politically powerful plans—including the United Mine Workers of America and the Central States Trucking Union—liberal lawmakers are seeking up to a hundred-fold increase in taxpayer bailouts for private, union-run pension plans.

Across the U.S., there are more than 1,300 union-run, or “multiemployer” pension plans. More than 90 percent of them have set aside less than 60 percent of what they promised to pay.

Private pension plans are a part of workers’ compensation. In the case of union-run or multiemployer pension plans, unions and employers together negotiate and manage pension plan contributions and investments.

Typically, workers receive lower paychecks in exchange for the promise of future pension benefits—i.e., a “secure retirement.”

Unfunded pension promises resulted, in large part, from reckless mismanagement. That mismanagement will leave workers more than $600 billion short of their promised benefits. Essentially, unions and employers have cheated their members and workers out of hundreds of billions of dollars in contracted compensation.

Instead of putting the unions and employers on the hook for their failure to make adequate pension contributions, many lawmakers seem willing to rob taxpayers to furnish those broken promises.

That would set a horrible precedent. Not only would it prop up failing industries that made reckless promises while penalizing those who have not—it would also cost taxpayers hundreds of billions, if not trillions of dollars.

It is absolutely unfair and reprehensible that unions negotiated and promised benefits that they did not then provide for, but taxpayers never had a seat at those negotiating tables. They should not be held liable for those unmet promises.

If they are, there will be little to stop current and future union-run plans from continuing to promise unrealistic benefits and then failing to fund those promises.

Unfair as it is for workers to receive less than their promised pension benefits, it is not unprecedented. That’s one reason the government created the Pension Benefit Guaranty Corporation (PBGC)—to provide insurance so that workers don’t lose all of their promised pension benefits.

When a private pension plan becomes insolvent, the PBGC pays out insured benefits—up to about $13,000 a year in the case of union-run pension plans.

But the PBGC itself is on tap to become insolvent within eight years. If that happens, it would be able to pay less than 10 percent of insured benefits.

Politicians that support bailing out insolvent plans argue that doing so will actually save taxpayers money, because it will prevent the plans from requiring PBGC assistance.

But that’s impossible. For starters, the PBGC is not taxpayer-funded, so taxpayers cannot be on the hook for its unfunded liabilities. And second, even if taxpayers were required to bail out the PBGC, it cannot be more expensive to provide a portion of promised benefits (the PBGC only insures benefits up to a maximum of about $13,000 per year) than it would be to provide 100 percent of plans’ promised benefits.

Instead of bailing out 100 percent of private union pension plans’ unfunded pension promises, lawmakers should focus on reforming the PBGC so that it can continue to provide pension insurance to workers’ and retirees whose pension plans have become insolvent—and to do so without a taxpayer bailout.

The magnitude of unfunded pension promises across the U.S. is enormous. There are over $600 billion in unfunded private union promises and more than $6 trillion in unfunded state and local government promises..

Lawmakers must not open the door to private and potentially public sector pension bailouts. Taxpayers who have their own retirements to save for cannot afford to pay for these broken promises.

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Killing the Obamacare Tax Penalty Would Not Amount to a Tax Increase

Only in Washington can removing a tax penalty be considered a tax increase.

The proposed tax overhaul that is quickly making its way through Congress would eliminate Obamacare’s individual mandate. That mandate—ruled a “tax” by the Supreme Court—charges taxpayers anywhere from $695 to upward of $10,000 (based on their income) if they do not purchase the type of health insurance that the federal government requires them to.

According to the most recent IRS report, for the 2015 tax year, 6.2 million taxpayers paid the penalty and 82 percent of those taxpayers made less than $50,000 per year. Another 12.7 million taxpayers qualified for an exemption, and 4.3 million more failed to report their health insurance status on their tax forms.

Without eliminating the individual mandate penalty, any of those 4.3 million taxpayers that didn’t report their health insurance coverage status and are not enrolled in an approved health plan will also have to pay the penalty next year when greater enforcement measures are scheduled to kick in.

So how does removing hundreds or thousands of dollars in “tax” penalties result in a tax increase, as some claim?

Well, if an individual or family decides that it is not in their best interest to purchase highly regulated, expensive, and often excessive health insurance, they will forego any Obamacare tax subsidy that they would qualify for if they did purchase the coverage.

Depending on each taxpayer’s income and available health insurance options, the Obamacare subsidies can range from no more than a few dollars to over $12,000 a year per individual and upward of $20,000 per year for families.

It is because the Congressional Budget Office counts those lost credits as tax revenue increases that the bill has been said by some to increase taxes on individuals and families making less than about $40,000 per year.

However, when the Congressional Budget Office looked at the impact of the proposed tax reform excluding the effects of eliminating the Obamacare penalty, it determined that all income groups would receive significant tax cuts through 2025.

The Congressional Budget Office’s conventional methodology, which says eliminating the Obamacare penalty would produce an increase in tax revenue, is misleading. What they are really saying is that the government would lose less revenue because some people would voluntarily forego a tax credit that they would otherwise claim if they bought the coverage.

The argument that this is somehow a tax increase also misses two other important points:

  • Declining the tax credit is optional.

The alleged tax increases—as a result of not receiving an Obamacare subsidy—are entirely optional. Individuals and families who currently receive tax credits for their health insurance can continue to receive the exact same credit under the proposed bill.

The only change is that they have the option—without penalty—to not purchase the government’s proscribed health insurance and, as a consequence, to not receive a tax credit.

Under the proposed bill, any time they change their mind, they will still qualify for the exact same premium tax credit that they would currently get for buying the coverage.

  • Taxpayers can’t spend the credits on what they want.

Unlike other tax credits that individuals receive back as cash, which they can spend on anything, Obamacare tax credits aren’t like cash. They’re more like gift cards that can only be used to purchase certain types of qualified health insurance from insurance companies.

Obamacare credits do not boost individuals’ or families’ disposable incomes. Instead, they boost insurance companies’ revenues. Eliminating the individual mandate penalty, on the other hand, could increase taxpayers’ disposable incomes by hundreds or thousands of dollars.

To count the decisions of some people to not buy health insurance—and thus forego Obamacare tax credits that were never actually delivered to them—as tax increases, is misleading to say the least.

Eliminating the Obamacare individual mandate will not reduce any taxpayer’s incomes by a single cent. It will, however, reduce the tax bills of many individuals’ and families—based on their own choices—by hundreds, if not thousands, of dollars.

And most importantly, it will leave taxpayers freer to make personal decisions absent the heavy hand of Uncle Sam.

The post Killing the Obamacare Tax Penalty Would Not Amount to a Tax Increase appeared first on The Daily Signal.

Why Setting the Corporate Tax Rate to Benefit Wealthy Taxpayers and High-Tax States Is a Terrible Trade-Off

Tax reform that broadens the tax base, reduces unfair and distorting loopholes and deductions, and cuts marginal tax rates promises to grow the economy. Yet Congress is considering undermining the full potential of tax reform because of pressure from special interests.

Eliminating a federal tax policy that provides an income tax break of nearly $200,000 to millionaires living in New York and California while requiring higher marginal rates for everyone else is a perfect example of achieving that pro-growth objective.

The proposed House and Senate tax reform bills did away with much of that economically destructive subsidy for state and local taxes by limiting it to a maximum property tax deduction of $10,000. But now, lawmakers are considering caving to the special-interest demands of a few of their colleagues from high-tax states such as California, New York, and New Jersey.

Those who are hijacking pro-growth tax reform want the federal government to subsidize the largesse of their own state governments. Making taxpayers in lower-tax states pay for the goods and services provided by high-tax states is neither fair nor good tax policy. And it just might encourage states to raise their taxes even higher.

Increasing state and local tax deductions reduces tax revenues, and therefore requires higher taxes elsewhere to bring in the same amount. Instead of reducing the corporate tax rate to 20 percent, lawmakers now are considering increasing that rate to 22 percent to pay for these special-interest tax provisions.

A higher business tax rate would negatively affect Americans across all states and all income levels. It would make U.S. businesses and the workers they employ less competitive with the rest of the world than they would be with a tax rate of 20 percent or lower.

That is the opposite of pro-growth tax reform. Trading a special-interest tax deduction that encourages bad economic policy (higher state and local taxes) for a higher rate on one of the most economically destructive taxes—the corporate tax—is a horrible idea.

Corporations don’t pay taxes, people pay taxes. The people who pay corporate taxes include workers, shareholders, and consumers. And those shareholders include not only wealthy investors but also retirees, nonprofits, and anyone with a pension or retirement account.

Recent studies provide growing evidence that in an open economy such as the U.S., workers bear a majority of the corporate tax in the form of lower wages—and this share is increasing.

Raising the corporate tax rate above the proposed 20 percent level that both the House and Senate previously stipulated would result in smaller paychecks and fewer jobs for workers who are employed by those corporations, higher prices for everyone who purchases goods and services from those corporations, and lower dividends and capital gains for shareholders of those corporations (many of whom are retirees).

That’s a big price to pay for providing a subsidy to a small fraction of wealthy taxpayers in high-tax states.

Very few low- and middle-income taxpayers would benefit from a higher state and local tax deduction, because not many of them currently itemize their deductions and even fewer would under the roughly doubled standard deductions of the reform proposals.

In fact, because of the higher standard deductions, The Heritage Foundation estimates that fewer than 6 percent of taxpayers who make less than $100,000 a year would benefit from keeping the state and local tax deductions.

Among those making between $50,000 and $75,000, only 4 percent would benefit. And among those in the $25,000 to $50,000 income range, fewer than 2 percent would benefit.

Lawmakers need to return to the principles of pro-growth tax reform and reject special-interest and economically destructive provisions that would benefit a small minority of wealthy taxpayers at the expense of lower wages, fewer jobs, smaller returns on investments, and higher prices for all Americans.

The post Why Setting the Corporate Tax Rate to Benefit Wealthy Taxpayers and High-Tax States Is a Terrible Trade-Off appeared first on The Daily Signal.