Law professor: With tax reform, the big winners are always the wealthy

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While politicians in Washington claim the proposed tax-reform will be a benefit to the middle class, experts are divided as to how much of a benefit it will really be.

Arizona State University law professor Adam Chodorow believes that many of the tax breaks outlined in the tax-reform proposal only have short-term benefits, and, as is the case with all tax reform, the largest benefactors will be the wealthy.

 

TED SIMONS: UP NEXT ON ARIZONA HORZON, HEAR ABOUT HOW THE SENATE TAX BILL COULD IMPACT ARIZONA INDIVIDUALS AND SMALL BUSINESSES.

TED SIMONS: THE SENATE RECENTLY PASSED ITS VERSION OF A TAX REFORM BILL, DETAILS OF WHICH ARE NOW BEING IRONED OUT IN NEGOTIATIONS WITH THE HOUSE. HERE TO TALK ABOUT HOW THE PROPOSED TAX REFORMS WOULD IMPACT ARIZONA INDIVIDUALS AND BUSINESSES IS ASU'S ADAM CHODOROW, WHO SPECIALIZES IN TAX LAW. GOOD TO HAVE YOU HERE. THANKS FOR JOINING US. BIGGEST REWRITE IN HOW LONG?

ADAM CHODOROW: SINCE 1986.
TED SIMONS: A LOT OF CHANGES. THE IMPACT ON PERSONAL INCOME TAXES, WHO GETS HELPED? WHO GETS HIT?

ADAM CHODOROW : AS WITH MOST TAX REFORMS THE BIG WINNERS ARE THE WEALTHY BECAUSE THEY PAY THE MOST TAXES. ANYTIME YOU’RE GOING TO REDUCE THE TAX RATES, YOU SAVE MORE IF YOU ARE WEALTHY THAN IF YOU ARE NOT.

TED SIMONS: SO IF YOU ARE MAKING UNDER $40,000, YOU ARE GOING TO EXPECT TO SEE WHAT?

ADAM CHODOROW: IT DEPENDS ON WHERE YOUR INCOME COMES FROM, YOUR FAMILY STURCTURE, BUT MAYBE $300 IS WHAT YOU’RE LOOKING TO SAVE UNDER THIS BILL.

TED SIMONS: IF YOU ARE MAKING A HUNDRED THOUSAND DOLLARS?

ADAM CHODOROW: PROBABLY, AGAIN, IT DEPENDS, $1,400 IN TAX SAVINGS.

TED SIMONS: IF YOU ARE MAKING $3.5 MILLION A YEAR.

ADAM CHODOROW: NOW YOU’RE TALKING REAL MONEY. NOW YOU ARE TALKING $68,000 YOU COULD SAVE.

TED SIMONS: THAT'S UNTIL 2025 WHEN EVERYTHING IN THE BILL GOES POOF? WHAT'S GOING ON WITH THAT?

ADAM CHODOROW: IT HAS TO DO WITH THE FILIBUSTER AND WHAT ARE CALLED RECONCILIATION RULES. ESSENTIALLY, YOU CAN GET AROUND THE FILIBUSTER WHICH REQUIRES 60 VOTES THROUGH THE RECONCILIATION PROCESS. THERE IS A RULE CALLED THE BIRD RULE THAT SAYS YOU CAN'T INCREASE THE DEFICIT BEYOND THE 10 YEAR WINDOW THEY USED TO EVALUATE THE BILL. THE TAX CUTS FOR INDIVIDUALS, FOR INSTANCE, IF THEY WENT THE FULL TEN YEAR, THEY WOULD CREATE A LARGER DEFICIT THAN PROJECTED. TO GET WITHIN THE BIRD RULE, THEY SAID OH WE’RE GOING TO HAVE THEM EXPIRE TWO YEARS EARLY.

TED SIMONS: ISN'T THAT KIND OF ACKNOWLEDGING THAT THIS WILL ADD TO THE DEFICIT?

ADAM CHODOROW: YEAH. IT'S A GIMMICK, PURE AND SIMPLE. IT’S A GIMMICK TO TRY GET THE NUMBERS WHERE YOU WANT THEM TO GO.

TED SIMONS: LET'S GET BACK TO THE GIMMICK AND HOW THIS AFFECTS YOU ME AND SMALL BUSINESSES AND HOW THIS AFFECTS ARIZONANS IN GENERAL. THE DOUBLING OF THE STANDARD DEDUCTION- FIRST OF ALL, WHAT DOES THAT MEAN AND HOW DOES IT IMPACT US?

ADAM CHODOROW: WHEN YOU SPEND MONEY, THERE ARE THREE WAYS YOU CAN DEDUCT IT. ONE IS ABOVE THE LINE FOR CALCULATING YOUR GROSS INCOME AND THE OTHER IS BELOW THAT LINE CALLED AND IT’S CALLED AN ITEMIZED DEDUCTION. OR INSTEAD OF TAKING ITEMIZED DEDUCTIONS, YOU CAN TAKE A STANDARD DEDUCTION WHICH EVERYONE GETS NO MATTER WHAT. IF YOU DOUBLE THE STANDARD DEDUCTION, WHAT THEY’RE GOING TO DO FOR A MARRIED COUPLE, YOU CAN DEDUCT $24,000 AGAINST YOUR INCOME REGARDLESS IF WHETHER YOU HAVE GIVEN TO CHARITY, PAID HOME MORTGAGE INTEREST OR DONE ANYTHING ELSE THAT WOULD BE DEDUCTIBLE.

TED SIMONS: IT SEEMS TO ME JUST FROM A DISTANCE THAT CHARITIES AND OTHERS THAT DEPEND ON THESE DONATIONS BECAUSE PEOPLE THINK THEY CAN GET A TAX BREAK OUT OF IT, THEY COULD BE HURTING WITH THIS THING?

ADAM CHODOROW: THIS IS AN UNINTENDED CONSEQUENCE OF DOUBLING THE STANDARD DEDUCTION. IT'S DONE AS A SIMPLIFICATION MEASURE. YOU CAN TAKE THE STANDARD DEDUCTION, YOU DON’T HAVE TO TAKE RECORDS OR KEEP ANYTHING ELSE, BUT IT BLUNTS THE EFFECT OF CHARITABLE DEDUCTION AND HOME MORTGAGE DEDUCTION.

TED SIMONS: SO MUCH OF THE TAX CODE INVOLVES INCENTIVES, DOESN'T IT?

ADAM CHODOROW: YES, SO THERE IS A LOT OF SOCIAL POLICY AND DISGUISED SPENDING THROUGHOUT THE CODE. WHEN YOU START TINKERING IN THE WAY THAT THE SENATE THE HOUSE HAVE DONE. YOU EFFECT THE PROVISIONS EVEN IF YOU DON'T AMEND THEM.

TED SIMONS: HOMEOWNERS CAN DEDUCT UP TO $10, 000 ON HOME PROPERTY TAXES, IS THAT CORRECT?

ADAM CHODOROW: THAT IS CORRECT. ONE OF THE ITEMIZED DEDUCTIONS TODAY, YOU CAN DEDUCT STATE AND LOCAL INCOME PROPERTY AND SALES TAXES. THEY ARE STRIPPING AWAY THE ABILITY TO DEDUCT INCOME AND SALES TAXES BUT LEAVING IN PLACE THE ABILITY TO DEDUCT UP TO $10,000 ON PROPERTY TAX.
TED SIMONS: SO ON BALANCE BETWEEN THE STANDARD DEDUCTIONS ON THIS SIDE, AGAIN FOR THE AVERAGE JOE OUT THERE, MAYBE THE ABOVE AVERAGE JOE, WHAT ARE YOU SEEING?

ADAM CHODOROW: I THINK INITIALLY, A NUMBER OF PEOPLE ARE GOING TO GET SOME MODERATE TAX RELIEF, BUT EVEN BEFORE THE REPEAL IN 2025 OF THE PROVISIONS BEFORE THEY EXPIRE, THERE ARE A NUMBER OF LOWER MIDDLE PEOPLE SEEING INCREASES UNDER THE BILL. AND AFTER 2025, 62% OF US WILL PAY HIGHER TAXES INSTEAD OF LOWER TAXES.

TED SIMONS: WE HAVE A MINUTE OR SO LEFT. SMALL BUSINESSES ESPECIALLY, I’M SURE THE CORPORATIONS CAN HANDLE THEMSELVES, FOR AN ARIZONA SMALL BUSINESS PERSON, WHAT DO THEY NEED TO WATCH OUT FOR? WHAT DO THEY NEED TO KNOW?

ADAM CHODOROW: THEY HAVE CREATED A PASS THROUGH TAX RATE THAT SAYS IF YOU HAVE A SMALL BUSINESS WHERE THE TAXES PASS THROUGH AND GET TAXED AT THE INDIVIDUAL LEVEL, WE'LL ALLOW A DEDUCTION TO PAY TAXES AT 28% INSTEAD OF 39%. IF YOU QUALIFY FOR THIS, YOU CAN AS A BUSINESS OWNER SIGNIFICANTLY REDUCE YOUR TAXES. IN CONTRAST TO SAY EMPLOYEES ARE BEING TAXED AT MUCH HIGHER RATES.

TED SIMONS: FOR A SMALL BUSINESS PERSON YOU ARE LOOKING AT CAPITAL EXPENDITURES WITH MORE RISING CAPITAL, OPPORTUNITIES…

ADAM CHODOROW: POTENTIALLY. THE PROBLEM IS THERE IS PLENTY OF CAPITAL AVAILABLE TODAY. INTEREST RATES ARE LOW.

ADAM CHODOROW: EVEN FOR THE LITTLE GUY. BY THE WAY, THEY ARE PLANNING ON GOOSING CAPITOL INVESTMENTS AS WELL BY ALLOWING DEDUCTIONS. ANYTIME YOU BUY AN ASSET UNDER THE SENATE PLAN, YOU CAN DEDUCT THE COST.

TED SIMONS: THANK YOU SO MUCH FOR JOINING US. THIS IS SO MUCH TO TAKE IN HERE. WE WANTED TO MAKE SURE PEOPLE KNOW HOW THIS IMPACTS THEM. WE HEAR A LOT ABOUT THE POLITICS OF IT BUT IT’S GOOD TO KNOW WE HAVE A LITTLE GRASP ON HOW IT WORKS FOR ALL OF US. THANKS FOR JOINING US, WE APPRECIATE IT.

ADAM CHODOROW: MY PLEASURE.

Adam Chodorow: Professor of Law, Arizona State University

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