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The Democrats’ big tax cut for the rich

Jerry Bowyer | Tax proposal is SALT in the wound to poor states


House Speaker Nancy Pelosi argues for the Build Back Better plan on Capitol Hill. Associated Press/Photo by Andrew Harnik

The Democrats’ big tax cut for the rich
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The legislative status of many of the Biden administration’s various spending plans has been in near constant state of flux. Wherever it all ends up, the plan currently is for the Build Back Better bill to include an obscure change to the tax code that will actually build back the bank accounts of affluent individuals in wealthy blue states—at the expense of taxpayers in poorer, lower-spending red states. This would be done by means of a rule that favors taxpayers in higher tax states through the federal tax code.

The Trump tax plan had placed a cap of $10,000 on the amount of state and local taxes (SALT) that could be deducted from federal taxable income. By doing so, it limited the ability of taxpayers to “write-off” state and local taxes. But a high or unlimited write-off of local taxes, by its very nature, favors those who paid the highest local taxes, and the mathematics of that favors two (overlapping) categories of people: those who are wealthy and those who live in high tax states. Furthermore, the deduction allowed to state and local taxes incentivizes liberal state governments to adopt ever-higher tax rates, politically cushioned by the federal tax code. It’s a perverse incentive.

When President Trump’s tax overhaul with the $10,000 cap on SALT deductions went through, the bias favoring the rich was removed, and predictably, wealthy blue states did most of the complaining. This also triggered headlines such as one from a consultant in the New York/New Jersey metro area talking about how his wealthy clients are fleeing the region “like it’s on fire.” If capping the deduction at $10,000 triggered panic among wealthy people in high tax states, then dramatically raising that cap clearly favors them.

And this unveils the profound contradictions between liberal tax rhetoric and real-world tax reality. The left talks about redistribution and rhetorically excoriates the wealthy, but then they pass bills that hand out tax favors to their friends. By the billions.

They might wag their heads in apparent displeasure at large companies that “pay no taxes.” Still, if you look at the details, you’ll typically see lavish deductions for “green” initiatives and other nods to social engineering via tax deductions, credits, and exclusions. In this, as well as many other cases (for example, inflationary policies that hurt the poor and help certain sectors of the ruling class), the left talks the talk of downward redistribution, but walks the walk of protecting their own. Of course, their preferred policies tend to be targeted to political allies, in this particular instance, the highest tax states.

Though the state and local deduction issue is debatable in general, it does present a certain cognitive dissonance for the left, in that it implies that state and local taxes are indeed expenses and not “investments.” Think of it this way: if those taxes buy something of genuine value, they should not need a tax loophole to encourage them. If these states are really delivering service enhancements commensurate with the tax bill, the voters can register that with their ballots and don’t need a thumb on the scale hidden in the details of the tax regulations.

What are Christians to think about all this? While the Bible is not principally focused on the details of tax policy, the examples we have point us away from tax policy as a means of handing out benefits to friends and detriments to enemies. The warning to Israel about choosing a king like the “other nations” in 1 Samuel 8 includes a warning that Saul would end up doing just that. The Torah commands that Israel favor neither the rich nor the poor. The fundamental principle seems to be grounded in a realistic view of human nature. We tend to love our friends and hate our enemies. That fact doesn’t change when we write tax law. In fact, it’s even easier to hide true intentions in the copious fine print of the IRS tax code. In other words, watch carefully when tax policy is being legislated, for a lot more than taxation is sure to be revealed.


Jerry Bowyer

Jerry Bowyer is the chief economist of Vident Financial, editor of Townhall Finance, editor of the business channel of The Christian Post, host of Meeting of Minds with Jerry Bowyer podcast, president of Bowyer Research, and author of The Maker Versus the Takers: What Jesus Really Said About Social Justice and Economics. He is also resident economist with Kingdom Advisors, serves on the Editorial Board of Salem Communications, and is senior fellow in financial economics at the Center for Cultural Leadership. Jerry lives in Pennsylvania with his wife, Susan, and the youngest three of his seven children.

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Fuzzyface

Being from Arizona I greatly resent us having to subsidize the taxes of the high tax liberal states. I suggest that those from those states resist more the high taxes or move - don't penalize us in states with more reasonable tax policies.
Tax policies that benefitted one region over another was one of the primary reasons for the Civil War. The south was getting better prices for their goods from Europe than from the north so the north put in tariffs on exports that made the prices of the southern farm goods drop drastically and forced them to sell their goods to the north.
Yes, the south was more wrong on slavery - but there was slavery in the north as well. Lincoln's Emancipation Declaration only freed southern slaves. There were many other issues that caused the contention to be decided by war. The north won so they got to write the history books so many of these issues were ignored or glossed over.

Tom Hanrahan

A more basic question might be: why are state & local income and property taxes deductible at the federal level AT ALL? If I earn income in NJ or Alabama and pay $10K in total taxes, why should the US taxpayer be "charged" by letting me deduct a % of that off of what I owe the US government based on my income as a citizen? Let's lower the US fed tax rates and get rid of more deductions.

( I see now that drasm and I basically agree; although I favor a decent std deduction to help the poor pay a lower amount)

David Rasmusson

I have an idea. How 'bout we scrap the current tax scheme and implement an across the board federal flat tax? All consumers pay an equal "x"% to the federal government and allow each state to implement their own tax policy according to needs and culture. The state and local tax structure here in Arkansas bears no resemblance to that of New Jersey. Why should a relatively poor state subsidize the SALT of a relatively rich state? The two have entirely different spending priorities.

TEACH ME LORD

Here in NJ we are clobbered with Taxes at every level, yet the church's mission still needs to go on, so we don't run away. Raising the SALT deduction cap is appreciated. It doesn't need to be totally removed, but certainly raised significantly.

MWOR2844

Maybe you ought to edit out the 'rich' and substitute 'middle-class', particularly here in NJ. Yes, the rich will benefit from removal of the SALT limit, but the middle-class will DEFINITELY benefit (and be extremely happy). With the present property, sales, and local and state taxes, we are hammered. So, flavor this away from the typical 'rich get the benefits' and pull it down the scale to us in the middle class, please.

BDAV4323MWOR2844

I totally agree with you. The problem is that saying the "middle class" are benefitting from the Democrats' choices doesn't inflame as many people and feed their bias. As believers, we ought to be more concerned with Biblical distinctions, not political ones. just sayin'....