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A penny you earn – and isn’t taken – is yours to keep

A penny you earn – and isn’t taken – is yours to keep

Dennis Wyatt


POSTED January 3, 2018 9:10 a.m.
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The national media is tripping over itself to try and sell the just-passed tax reform as a tax increase.

USA Today cited five hypothetical households in a bid to depict the tax reform signed into law as a disaster. One of the five was a single taxpayer without children and who is a renter. The renter is earning $1 million a year, pays $50,000 in state and local taxes and is claiming charitable deductions of $40,000. USA Today applied the new tax formula and determined the hypothetical taxpayer will play $1,887 more a year in federal taxes.

Boohoo.

Now let me tell you about a single taxpayer without children and who rents a room who happens to live in the area. (I presume the person in the USA Today example can afford to rent more than a room.)

He paid $173 a year for his 2016 state taxes and $2,020 to the IRS including a $695 fine for not having healthcare coverage. The 25-year-old grossed $22,289 in 2016. I know this because I do his taxes.

The new tax reform will put $827 back into his pocket - $132 in less federal taxes and $695 from the Affordable Health Act penalty that will be history.

I've read more than a few pundits that have mocked the idea that the typical middle class family will see about $100 a month in tax savings from the reforms put in place saying this is an insignificant amount so therefore it doesn't constitute true tax reform. I know quite a few families that have perhaps the equivalent of a week of savings and are essentially living paycheck to paycheck. An extra $100 a month isn't got to put them on easy street but it would give them wiggle room.

In the case of the local 25-year-old, the government will take $68 a less a month from him. When your gross $1,455 a month after taxes, healthcare penalty and Social Security contribution, $68 extra is a big deal especially if you're living on the edge in an area like the Valley where the cost of living is killing you.

Why doesn't he buy health insurance on the ACA exchange? Three reasons: He's not stupid, he can do the math, and he doesn't want to live on the streets.
Shopping po
licies it was clear under rules in place he'd be shelling out at least $1,500 a year for insurance that has deductibles he couldn't afford to pay if he accessed the insurance. Worse yet, it would squeeze his budget so much he couldn't afford routine "health" needs such as eye glasses. He is better off not buying a policy and paying the fine.

Some may call that gambling, but I'd call it simple addition and being pragmatic. Plus if you take much more money out of his pocket the street may become his only housing option.

I get the dramatic death throes as political posturing takes place in the well-heeled bowels of Congress. They don't like the winners and losers that have been picked.

And while a large chunk of the money that once went to pay for taxes will be freed up for investment and consumer spending which in turn will generate new tax revenue and backfill the government treasury, the new tax reform reduces their ability to finance the transfer of wealth at will for social engineering. They also keep forgetting the private sector creates a significantly larger amount of jobs than the public sector and they do so without raising taxes.

There are winners and losers in everything. That said even a liberal organization such as the Tax Policy Center concedes nine out of 10 middle class households will have a tax cut starting next year with the average being $1,600 annually. Unfortunately the single renter making $1 million a year as cited by USA Today isn't one of them. They'll be paying $1,887 more in federal taxes or the equivalent of 4½ weeks of pay for the 25-year-old Manteca guy or what a single renter grossing $1 million annual makes in 4 hours of work.

The first three income tax brackets are cut back to a lower percentage meaning the working class and working poor will see fairly miniscule benefits. In the 25-year-old's case the tax liability change puts 7 cents an hour back into his pocket for $132 a year. That, however, doesn't take into account being freed from the mandatory fine imposed through the IRS for not having health insurance. Add the $695 into the equation and suddenly he's getting the equivalent of a 40 cent an hour increase in his take home pay. While it's nothing to a congress member making $174,000 a year with a lot of great benefits such as health care, it's a big deal when you are a working stiff making just a notch or two above minimum wage.

No expert disagrees that roughly 95 percent of the taxpayers will see a tax reduction. And it is also true that for much of the middle class taxes will go up after eight years unless the cuts that are now scheduled to expire in 2026 are extended. That said, taxes will go down between now and then for eight years.

I seriously doubt you're going to see it start raining money as some pie-in-the-sky reform advocates argue but I also don't think it's going to send anyone to the poor house.

The reality will fall somewhere between those two extreme positions.

Meanwhile, look at it as Benjamin Franklin might - a penny not taken in taxes is a penny you can do with as you wish.

This column is the opinion of Dennis Wyatt and does not necessarily represent the opinion of Morris Newspaper Corp. of CA.

 

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