The Standard Deduction is bad for Democrats. The Standard Deduction gives Americans a choice… we can either deduct the standard deduction and then stop there, or we can choose to itemize our deductions one by one, but we don’t get the standard deduction if we choose to itemize.
So why is this bad for Democrats? Well, the reason is that Democratic states are more likely to support raising taxes like income taxes to support state programs and the SALT deduction cannot be used if you are using the standard deduction. I believe this minimization of the SALT deduction is the main reason Republicans doubled the Standard Deduction in 2018. This means that for most taxpayers we would be better off with a tax code that had a 0% tax rate on the first $50,000 of income and then be able to itemize the SALT deduction and other important deductions. Because of this, many deductions (such as the much-hated home mortgage interest deduction) cannot be used by many households until they are paying enough in home mortgage interest and state taxes over the course of the year to be greater than the Standard Deduction. This means for many middle-class Americans, the standard deduction means they pay more tax than they would otherwise. For the vast majority of taxpayers, the current system vastly underperforms a tax code with no standard deduction but no taxes paid on the first $50,000 of income for this reason.
The standard deduction is also very unequal in how it impacts the tax bill of people who use it. Let’s take a taxpayer who earns $30,000 a year, or a full-time $15 per-hour job. This person will pay around $2,970.40 in total federal taxes in our current system or 17% of their income. Removing the standard deduction and exempting the first $50k of income from the income tax means they pay only $1,860, basically only payroll tax into Social Security. For very high-income taxpayers who make $200k (assuming as a single individual) they see their tax rates drop from $26% to 20% (assuming no other changes) and for the ultra-wealthy taxpayer who makes $500k, their tax rate changes from 31% to 29%. Basically, replacing the standard deduction with 0% tax on the first $50k makes the biggest impact on the tax paid for low-income taxpayers. This would permanently benefit 99% of Americans. Unlike Republican tax cuts in the past, this change would be permanent.
This would cost the Federal government some money, but I would pay for it by reinstating the 70% tax rate for people who make over $1,000,000 per year, a 50% tax bracket on people who make over $500k, and 60% on people who make over $750k. 99% of Americans will never be impacted by this change. This would be the biggest shift in the tax burden for the working and middle classes in history. In exchange for this higher tax rate for the uber-wealthy, I would also remove the cap for the SALT tax deduction. On top of this, I would also tax capital gains as regular income which would mean retirees with IRA plans will benefit from the tax holiday on the first $50k of income they make. This compromise should make this entire tax swap deficit neutral if not even cut the deficit altogether while also putting money into working Americans’ and retirees’ pockets.
Another major impact of this will be how then how every American will have access to the IRA deduction, whereas people who take the standard deduction have no access to it. This is one of the simplest ways the Federal government can boost America’s savings rate, by making it so everyone has access to that critical deduction.
In short, this is a plan which will enable state governments to fund much-needed programs, reduce taxes on 99% of Americans, and also reduce the Federal deficit.