Trump, Tax Reform, and Mormons

On Wednesday, Donald Trump released his tax reform plan.

Scratch that: he released a one-page outline detailing highlights of what he wants his tax reform plan to look like. But even with its limited details, as my friend and colleague David Herzig points out, it is worth taking seriously. Presidents have traditionally had some power to shape tax reform according to their priorities, and at the very least, Trump’s Wednesday memo provides insight into his tax preferences.

And, because this blog focuses on Mormonism, here’s a great place to ask this question: how will his tax priorities affect U.S. Mormons?

@smbrnsn the memo really does read better in Comic Sans. @realDonaldTrump pic.twitter.com/Ap4lnyOfHi

— Allison Christians (@taxpolblog) April 26, 2017

Not surprisingly, there’s nothing in Trump’s tax memo that explicitly relates to Mormons, or, for that matter, to religious individuals generally. Nonetheless, there are two provisions that should probably be of interest to Mormons generally.[fn1]

Both issues of interest derive from the same thing, though: the doubling of the standard deduction.

What Is the Standard Deduction?

Put simply, it’s a default deduction that all taxpayers are permitted to take. The standard deduction is adjusted for inflation; in 2017, the standard deduction for a married couple filing a joint return is $12,700.[fn2]

Note that while all taxpayers are permitted to take the standard deduction, about one-third of taxpayers choose not to take it. See, a taxpayer can choose between the standard deduction and itemized deductions. There are a number of itemized deductions under current law, but the big three are deductions for mortgage interest, for charitable contributions, and for state and local taxes. Basically, if those three deductions together exceed $12,700, you will probably choose to itemize your deductions (and thus not take the standard deduction). If those three deductions are less than $12,700, you’ll take the standard deduction.

In his plan, Trump proposes to double the standard deduction. That would mean in 2017, all (married filing jointly) taxpayers would be able to deduct $25,400.

Paying Tithing

It’s counterintuitive, but doubling the standard deduction would increase the cost of paying tithing to some portion of middle-class U.S. Mormons.

Why is that? Because some percentage of U.S. Mormons have itemized deductions between $12,701 and $25,400. Under current law, those Mormons itemize. Assuming they’re in the 25% tax bracket,[fn3] they don’t bear the full after-tax cost of their tithing. That is, they get a deduction for every dollar of tithing they pay in excess of $12,700, which reduces the after-tax cost of that dollar by 25 cents. After tax, that dollar of tithing costs 75 cents.

Once the standard deduction is doubled, those Mormon taxpayers bear the full cost of their tithing. And yes, the full effect is more complicated than that: they may be better off, because they get a bigger deduction under the Trump plan than they do under current law.[fn4] But they get that bigger deduction whether they pay tithing or not; if they choose to pay tithing (and, again, have itemized deductions between $12,701 and $25,400), they bear the full cost of their tithing.

It may affect churches (and other charitable institutions), too. As I’ve said before,[fn5] charitable giving is elastic, meaning the amount we give depends on the cost of giving. How elastic is it? I don’t know, but research has demonstrated some level of elasticity in charitable giving.

(And what about the fact that fully two-thirds of taxpayers don’t itemize? It may be that the charitable deduction is hypersalient. That is, taxpayers (led on by charitable fundraisers) may overestimate the likelihood that their donations will be deductible. If this hypersalience hypothesis is correct, query whether eliminating another swath of itemizers, and the publicity that would surround the change, would reduce the hypersalience of the charitable deduction, as people discovered that an even larger percentage of taxpayers will not be able to deduct their charitable contributions.)

Effect On Family Size

Stephanie Hoffer, another friend and colleague,[fn6] just wrote about how Trump’s proposal would affect middle-income families. I strongly recommend reading her post; I’ll hit a handful of high points here, but she explains it in greater detail.

Basically, she says, doubling the standard deduction is expensive.[fn7] Trump hasn’t said how he will pay for it, but the Republican blueprint for tax reform would pay for it by eliminating personal exemptions. The personal exemption is another deduction, this one available to (basically) all taxpayers, whether they itemize or not. Like the standard deduction, it is indexed to inflation. In 2017, the personal exemption is $4,050. Essentially, that means a married taxpayer filing jointly gets to deduct $4,050 for herself, $4,050 for her spouse, and $4,050 for each dependent.[fn8]

If personal exemptions are eliminated, suddenly, the doubling of the standard deduction doesn’t look like a tax cut at all, at least for families with more than one child.

The average number of children born to Mormons between the ages of 40 and 59 is about 3.4. If we round down, that’s a five-person family. The parents would be able to deduct $20,250 in personal exemptions, as well as $12,700 as a standard deduction. That’s $32,950 in deductions. If the personal exemptions go away, even doubling the standard deduction only provides $25,400 in deductions.

That’s $7,550 less in deductions, which, at a 25% marginal rate, means that family would pay $1,887.50 more in taxes under the Trump plan than it does under current law.

Of course, the actual number assumes the elimination of personal exemptions, and depends on the interaction of various other provisions of a changed tax law (including, perhaps, expanded childcare credits, though, as Stephanie points out, those don’t help where one parent is a stay-at-home parent).

Why Do This Speculation?

Because Trump’s tax plan includes a listening process. He says that, throughout May, his administration will hold listening sessions with various stakeholders to hear their input and to figure out how to fill in the details. And if Mormons want their voices to be heard in this process, we need to understand how the proposal will affect us, and be prepared to advocate for a tax law that will raise revenue for the government in a fair manner.

[fn1] Note that to some extent, what I lay out is speculative—Trump hasn’t laid out any specifics, and, for that matter, his plan is probably unenactable as it currently stands. But it’s what we currently have to evaluate.

[fn2] To figure out how much a deduction reduces your tax liability, you have to multiply the deduction by your marginal tax rate. If, for example, you pay taxes at a marginal rate of 25%, the standard deduction will reduce your tax liability by 0.25 * $12,700 = $3,175.

[fn3] Why do I keep assuming my hypothetical Mormon taxpayer is in the 25% tax bracket? Basically because that makes my math easier.

[fn4] Or they may be worse off, depending on the size of the tax brackets, depending on what other changes happen, depending on what happens to spending, etc.

[fn5] I’d link to it, but it’s after midnight as I type this, and I have an early meeting tomorrow morning, so I’m not going to look for it.

[fn6] And friend of the blog: a year and a half ago, she was kind enough to write a guest post for us about the ABLE Act.

[fn7] The Committee for a Responsible Federal Budget estimates that it would reduce federal revenue by $1.5 trillion over 10 years. That number depends, of course, on the new tax brackets, but the cost will be significant.

[fn8] For these purposes, I’m going to treat dependents as minor children. As Stephanie points out, though, they can also be parents or other people who live with a taxpayer and who that taxpayer supports.