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The Republican Tax Reform Law: What did it do? What did it cost?

  • The Republican tax reform bill passed in December 2017 wiped out the ability for pilots and flight attendants to write off all job expenses.
  • Pilots and flight attendants will no longer be able to write off the per diem deduction, their union dues, their job search expenses, luggage, etc.
  • Hardest hit are people with families, due to the loss of personal exemptions, people in states with high income taxes, and people with significant mortgage interest.
  • Some people will see a lower tax bill. If you didn't fall into any of the categories above, you might see a slight tax benefit, but it will be largely offset by the $2 trillion cost of the package.
  • To understand how expensive it was, we recommend you read this news article from The Hill: Instead of Tax Cuts we Could Literally Fund Anything Else
  • The tax reform has not paid for itself, as suggested. The CBO (Congressional Budget Office) estimates the deficit will exceed $1 trillion per year by 2020, and the debt will exceed $33 trillion by 2028. The cost nearly doubles the deficit that existed when Donald Trump became president.

It's been almost one year since the Republicans passed a sweeping tax reform bill, but there is still a lot of confusion about it from pilots and flight attendants. Many are not aware of what the tax reform law changed and how it affects their personal taxes. For pilots and flight attendants, especially those who live in higher tax states and have families, the answer is not good.

Nobody likes the idea of complex taxes. Simplification was used as a justification for many of the tax deductions the Republicans took away when they passed tax reform. But as much as it was supposed to simplify taxes, it's created a lot of confusion. And it's likely that if you currently need TurboTax or an accountant, that won't change.

What did the Republicans change?

The short-term answer is they raised the standard deduction and reduced tax rates, while eliminating personal exemptions and itemized deductions. On the surface that doesn't sound too bad. However, the devil is in the details.

As mentioned, the Republicans raised the standard deduction while getting rid of many itemized deductions and personal exemptions. Before tax reform passed, each member of your family was considered a personal exemption of $4,050. For example, if you are a family-of-four, that would be $16,200 that you immediately removed from your tax bill. That disappeared. Personal exemptions no longer exist in the new tax law. The standard deduction before the law passed for that family was $12,700, so a family of 4 was already well above the new "higher standard deduction" that they created, which is $24,000, but with $0 in exemptions. In other words, for a family-of-four that doesn't itemize, tax reform costs them $4900 in deductions/exemptions. But there is a child tax credit increase that offsets much of the $4900 lost deduction. The child tax credit went up from $1000 per child to $2000 per child. So that $1000 credit increase per child largely makes it a neutral situation for a family that doesn't itemize. However, it gets far worse if this family itemized, had state and local property tax, or had job expenses. In those cases, the family-of-four stands to lose $30,000, $40,000, or even $50,000 in deductions/exemptions, depending on their situation.

Who benefited from tax reform?

Some higher-paid pilots used to be affected by the AMT (Alternative Minimum Tax). The AMT exemption increased, meaning they are less likely to be hit by it. However, this does little to benefit them because the tax deductions that the AMT prohibits were eliminated. Business owners might benefit. The focus of the tax bill was to help corporations, so that is where the biggest benefit is felt.

Didn't it lead to increased wages?

The hype of the tax bill was that if corporations had extra money they would use it to create new jobs and raise wages. Unemployment is low now, but it was trending down from a peak that happened at the end of the last recessions. See: Unemployment Rate Historical Graph. When you look at that graph it becomes apparent that unemployment has been reducing since April, 2010. Tax reform didn't affect it at all.

Some companies did give bonuses to employees after the legislation passed, but few, if any gave employees permanent wage increases as a result of it. And the companies that did give bonuses all made sure to put out a big press release as they did it, just to plant the idea in the eyes of the public that wages are going up because of tax reform. Natural wage increases happen when unemployment numbers get so low that employers need to pay more to compete. That may happen, but it was heading that direction with or without tax reform.

What did it cost?

The amount is difficult to grasp. Under the rules of reconciliation, the bill had to be projected to cost less than $1.5 trillion over the next 10 years. However, after the bill passed, the CBO revised its estimate of what it will actually cost and determined that it will exceed $2 trillion. When we hear that it costs $2 trillion it doesn't mean much. It's just a big number.

Consider this. $2 trillion is more than three times as much as the cost of the bank bailouts during the Obama Administration when the banking system was on the verge of collapse. $2 trillion is enough to hire 700,000 new public school teachers and pay each of them a $70,000 per year salary for the next 40 years.

There are many ways the United States could have invested $2 trillion that would have been beneficial to the long-term economy. It actually ended up going to people who already had more money than they knew what to do with, and the $2 trillion price tag will be added to the national debt to be inherited by future generations.

The CBO (Congressional Budget Office) now estimates, due to the cost of the tax reform bill, that the deficit will exceed $1 trillion per year, and the debt will exceed $33 trillion by 2028. That nearly doubles the deficit that existed when Donald Trump became president.

What's all this about?

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