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March 02, 2023 The Tax Lawyer

Musings: Itemized Deductions and The Changing Fabric of American Society Wrought by the Tax Cuts and Jobs Act – Observing Regressiveness Hidden in Plain Sight

Vol. 76, No. 2 - Winter 2023

by William P. Kratzke

Abstract

Taxpayers who take advantage of the Code’s exclusions, deductions, and preferential rates implicitly “vote” on the shape of American society. Pre- TCJA, the Code enfranchised “aspirational” taxpayers who sought to own homes in flourishing neighborhoods, to educate their offspring, and to retire comfortably. The TCJA disenfranchised such taxpayers and enfranchised a business owner/investment class who will vote for a different type of American society. This article evaluates the TCJA’s changes to the Code against this straightforward rubric: “Does a change to the Code’s itemized deductions make our society better? A change should impel those who would reduce their income tax liability through itemized deductions and other preferences to make society better.” The TCJA ditches one class of taxpayers in favor of another without addressing, indeed exacerbating, the invidious discriminations of the pre-TCJA code. The TCJA makes the Code into an instrument of exacerbating and entrenching wealth inequality.

An “across-the-board” percentage tax cut too obviously reduces the income tax liability of high income taxpayers more than it reduces the income tax liability of other taxpayers. Congress did not cut taxes “acrossthe- board” in the TCJA, instead reducing disproportionately the ordinary income of high income taxpayers through deductions realistically available only to them, broadening the tax brackets below the top bracket, and compressing tax brackets from the top. Tax preferences are increasingly realistically available only to high income taxpayers. Tax preferences previously available to lower income taxpayers have either become unavailable to them (but not to high income taxpayers) or atrophied. This worsens inequality as the TCJA decreases the marginal tax bracket on all of a taxpayer’s taxable income much more for high income taxpayers than for lower income taxpayers. This decrease in progressivity or increase in regressivity is hidden in plain sight.

Progressivity would be enhanced by changing itemized deductions into tax credits equal to a percentage of an expenditure for which Congress wishes to provide a tax benefit. The expiration of many TCJA provisions provides Congress an opportunity to move away from itemized deductions and towards tax credits. This would re-enfranchise many taxpayers who lost their voice in shaping American society. Maybe that society was not ideal, but the TCJA did not improve it.

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