Trump’s Tax Reform: Can It Really Become Law?

Just so you know, it requires a great deal of restraint on my part to keep from writing about my political opinions here on the blog, especially about our new president and the chaotic events that seem to occur almost every day down in Washington, DC. My wife has reminded me that my readers here at Super Saving Tips aren’t looking for that sort of thing, and that you the readers are more likely to peruse the New York Times or Washington Post if you want political fodder. But wonder of wonders, I finally do have a little something to say that actually involves your personal finances and politics. So hopefully you’ll be interested this time around. It’s about…tax reform!

Trump has proposed some broad changes to our tax code, the biggest tax reform since the 1980's. But can it really become law? Here's why it isn't likely.

Trump’s Proposed Tax Reform

Our new president has presented the first trickles of information about his plans to reform the tax code and fulfill his campaign promise to review and change the federal tax laws. He and his Treasury Secretary, Steve Mnuchin, say it will be the biggest tax cut ever (fact check: actually it will be the biggest cut since the 1980’s and Ronald Reagan). Now normally when you talk about cutting taxes, that’s a pretty popular idea out there among the constituents.

But a huge tax cut doesn’t make it necessarily a good thing. What makes it good is if it has a positive effect on the lives of the American people and stimulates the growth of the American economy. The jury on that will be out for quite a while until we have all of the details.

Most of us with earned incomes spend a lot of time trying to find ways to reduce our tax liabilities during the year finding deductions like medical expenses and our real estate taxes, or shifting our tax liabilities to another time frame by opening up traditional IRA’s or investing in a 401k, etc.

Why It Won’t Become Reality

While the new tax plan already being discussed (or should I say disgust? opinion interjection, sorry), discussion may be all it ever is based on what I have seen and heard so far. In fact, revising and cutting the tax code as it has been presented may likely never happen for several reasons and here are a few of them right now:

1. Lowering corporate tax rates isn’t really a priority for you and me

Do many of us lose sleep at night over whether or not the corporate tax rates in our country are too high? I don’t think so. After all, there seems to be more concern from a lot of us about what exactly corporations pay in taxes and whether they pay their fair share…or any taxes at all! According to USA Today, in 2015, 27 major US corporations paid absolutely nothing, zero, in corporate federal taxes. This includes corporate giants like United Airlines, General Motors and Proctor & Gamble.

The rationale behind lowering corporate taxes from the current 35% down to 15% is this: many US corporations have packed their bags and gone off shore so that they can avoid our higher rate of taxes. Most countries around the world have lower corporate tax rates.  Lowering the rate will bring them and their money back home to the US and provide more jobs and facilities here at home.

Frankly though, there is no real proof that that will actually happen. Whenever a company has had the good fortune of making more and more money and retaining it through lower taxes, it hasn’t translated into more new jobs. The first priority of these corporations is to take care of their stockholders. It may mean expansion and more jobs, but that really depends so much on the global market, world events, politics, and being the right fit in a global economy. Taxes are only a part of the picture.

2. Lower corporate taxes don’t always mean new jobs

Our new president campaigned and promised more new jobs than any president has ever created. That’s an interesting claim and promise and here’s why. With the rapid development of artificial intelligence and robotics in our world, many experts think that by the year 2025 about 30% of all jobs that these innovations affect will be lost and create a larger inequality in wages both here and around the world. About 50% of the experts think that way.

While it’s true that there may be newer kinds of jobs created by the advancement of AI and robotics, these jobs will probably come from highly technological sources and thus impact those who have not been prepared for these changes ahead. Advanced degrees in very special fields will become even more important over the next 10 years than ever before. Wage and employment disparity will result.

Coincidently, just when our President foresees millions of new jobs developing over his term in office and our economy expanding, he doesn’t talk about creating “more scientific and technology oriented” jobs dealing with climate change and newer fuel sources like hydro-power and solar power. I haven’t heard him mention a single word about AI or robotics at all.

3. Cutting corporate taxes has a cost

We don’t have all the details as of yet, but early analysis by The Tax Policy Center in Washington DC says that cutting the tax rate for corporations from 35% to 15% would reduce collected revenue by trillions of dollars during the next 10 years.

The president says that will be made up by increased economic growth, but not everyone thinks that can happen. With our national debt currently at record levels (20 trillion dollars and rising), the idea of reducing corporate taxes and increasing the debt by another couple of trillion seems very dangerous to me.

4. Personal tax cuts that benefit the wealthy

It seems from what has been released so far that the proposed new tax rates for people will go down. The simplification of the tax code sounds pretty appealing. According to the president, most of us would submit a postcard-sized form as our tax return and we can do it all by ourselves, no CPA or accountant needed.  I guess that spells trouble for H & R Block. But I have to admit, that does sound very appealing.

The changes would create fewer tax brackets and double the standard deduction that we are able to subtract from our gross income that reduce our tax liabilities. For a married couple, they are saying that means the deduction from your gross income (your W-2 income) would be $25,000, and again, that sounds terrific.

But there are some questions that I and others have raised. There are lots of sacred deductions that will be eliminated under the proposal. Things like medical deductions, real estate tax deductions, state and local sales taxes deductions, and contributions to your IRA for example would be eliminated. According to what has been said, the only deductions that would remain would be your mortgage interest deduction and charitable donations.

What experts are saying is this: this tax revision will primarily benefit the wealthiest Americans. For one, the wealthiest Americans will love the rules about estate taxes and their elimination under the plan that will save the wealthiest one percent billions of dollars.

According to Norman Stein JD, Professor of Law at Drexel University and nationally recognized expert and authority on tax law, and Sebastian Bradley, PhD and Assistant Professor of Economics at LeBow College of Business, it will very likely increase taxes for a substantial portion of the American middle class.

Because of the loss of the deductions, it will have the most impact on the upper 25% of those who are in the middle class. Coincidentally, these wage earners live in mostly “blue states”. Hmm, makes me think a little bit, how about you?

Currently, there are seven tax brackets and the proposal is to reduce that to just three. Currently, the highest tax rate is 39.6% for couples whose adjusted gross income is over $470,000. Generally speaking, reducing the tax and the number of brackets will clearly and significantly benefit those people and make the tax more regressive than it is currently.  People in the lowest tax paying group will probably see a slight increase in their tax liability. Presented as “tax simplification” according to the experts, it’s simplification but has very little to do with this reform as it has been presented to us.

5. Corporate versus personal taxes: what if you become a corporation?

Besides the loss of revenue from the reduction in corporate taxes, a big problem in the proposal is that the corporate tax rate of 15% will be lower than the lowest rates for single taxpayers. What that means is that there will be a tremendous incentive amongst professionals whose income is derived from their businesses to become corporations or LLC’s. They would be taxed at 15% instead of 25% that way. If you are a doctor, lawyer or even a very successful Uber driver, you could simply form a corporation or LLC and be taxed at the lowest rate, lower than individuals. Yes, I see it now, “The Gary Weiner Corporation”. Make sure you sign in at the front desk before you take the elevator to my corporate office… If you are a regular 9-5 working guy or gal, you’d just be out of luck and taxed at the higher regular rates.

6. What happens when you combine proposed increases in spending with a tax revenue reduction? Well, let’s ask a 3rd grader!

Even my 9-year-old nephew can figure out this one. Spending more and taking in less will increase our deficit and national debt, by trillions! Apparently the treasury secretary and the president and his advisors don’t quite get that. The president wants to spend billions on the border wall (and Mexico will pay for it!), increase military spending, hire thousands of new border guards, spend billions on repairing the roads, airports etc. and even more. All with less tax revenue and “hopefully” increased GNP. Reminds me of the old line, “If my aunt had a mustache she’d be my uncle.”

Oh yes, I suppose that we will be cutting back on “entitlement programs” to help pay for all of it, won’t we?

This all has the smell of failure around it and I do not want to think about the burden of debt it will leave on future generations. They will have to pay for the debt as it continues to increase.

7. Our political parties just can’t agree on anything!

The single biggest reason that the Trump tax plan might fail is really obvious and simple.  Democrats don’t like reducing the entitlement programs that the tax revenue supports, and the Republicans are so fragmented that they can’t agree on what time of day they should break for lunch! For that reason alone, in order to pass any tax reform legislation, it will have to be revised and revised and watered down and amended to get any kind of consensus. That’s a very daunting problem.

Who knew that passing laws and making changes in Washington would be so difficult?

What do you think about the proposed changes to the tax laws? Are you ready to form your very own corporation to save on your tax bill? How will cuts in federal programs affect you, and is it worth it to save on your taxes?

Related Post: Deep in the Heart of Taxes

About Gary Weiner @ Super Saving Tips

Over the last 45 years I’ve worked in retail (department stores and supermarkets) and financial planning. In addition, I am a shopper, born and bred, who enjoys the challenges of finding the best items for the best prices. When I’m not busy saving money or writing here at Super Saving Tips, I enjoy baseball, music, and classic movies. I am retired and live in New Jersey with my wife.

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11 Comments

  1. One of the big proposed changes I’ve heard that would hurt a lot of families is getting rid of the personal and dependent exemptions in exchange for the larger standard deduction. It means that the huge standard deduction actually makes a lot less of a difference than folks might think…less than $1000 off your taxable income if you’re married with one child, and actually more taxable income if you’re married with 2.

    Plus, at least early versions of the plan discussed doing away with Head of Household status, which would leave single parent households worse off. And there’s an idea floating around of offsetting the loss of revenue by changing retirement plan rules. Ouch!

    I don’t actually mind the idea of lowering corporate tax rates down to 20-25% to try to keep businesses from leaving (although my understanding is that the average EFFECTIVE corporate tax rate leaves us far closer to the international average than the highest MARGINAL tax rate.) But the Trump plans for personal income taxes won’t help most families.
    Emily @ JohnJaneDoe.com recently posted…Mutual Fund Terms: Don’t Guess the Flavor EditionMy Profile

    • Thank you, Emily, for highlighting those important points. I have a lot of concern for the people who will not be benefitting from the proposed changes. Unless I see further information that will influence my opinion that this kind of tax reform will accomplish what President Trump intends, I’m going to remain skeptical.

  2. You have to wonder why Trump would support a tax reform that does so little to help the majority of people that voted for him. Rather, he seems to be more interested in enriching himself and other wealthy people. Granted, it won’t happen, as you say, but that makes you wonder even more his political sensibilities. He was voted in as a change candidate, but I think he has lost his way a bit.
    Barnaby @ Personal Finance King recently posted…One Can’t-Miss Strategy for Landing Your Next Good-Paying JobMy Profile

    • I would agree with your comment, Barnaby. It is quite confusing to see that his tax plan will not benefit the middle class and those who are dependent on government programs. In addition to the tax policy, it seems certain that his budget proposal for 2017-18 will have to cut back on programs that help an awful lot of people to pay for a tax cut. Thanks for your comments.

  3. Hooray for your nephew! Smart kid.

    I’ve often wondered if the postcard thing was just click bait. Is there really any intention for that to happen? I don’t think any of the proposed taxes would help or hurt Mr. G and me much. But there’s so much noise, it’s hard for me to pay attention to the talk.
    Mrs. Groovy recently posted…That Time I Lied and Fake-Cried to Save My Family $1,000 in Airline FeesMy Profile

    • I don’t think that the proposed tax changes would help or hurt our situation very much either. I do think that the majority of Americans are going to question a tax cut for the wealthiest people in our country under the guise that somehow it will “trickle down” as the old phrase states. Noise coming from Washington has become an everyday occurrence. Thanks for your comments, Mrs. G.

  4. Like you, I avoid political commentary – especially when it comes to American politics (since I’m Canadian). Trump’s victory still astounds me, but I’m willing to hope for the best. He’s way more right wing than I am, and I’m inclined to see the down-side of reduced taxes. A very pro-business stand often overlooks the stability provided by social programs that are harmed when taxes are cut. But who knows? Maybe the economy will grow as Trump says, and money will become available for social programs from sources other than taxes. Hmmmm…. Does that ever happen though?
    Fruclassity (Ruth) recently posted…Beware of Financial Advice That Doesn’t Apply to YouMy Profile

    • Ruth, I think a lot of us still have our heads spinning at our election results. As willing as I am to give our president a reasonable chance to change things and create more prosperity, I have not seen much evidence of that happening in the first few months of his term. Usually I try hard not to interject my own political opinions (actually I’m very independent when it comes to politics), but I do agree with your observation about social programs and their importance. Supporting a tax cut for the wealthiest Americans is not on my radar and whether or not it will help the economy is very much in question. Thank you so much for your observations.

  5. It’s a great time to start a business anyway, if the tax rates go down, even better!

    I don’t think it will get done. The Republicans are taking a lot of heat for the recent healthcare repeal, I think they will probably keep taking heat and struggle to get through another bill.

  6. Your attempted restraint is admirable, Gary :). I’m not going to speculate on whether you’re right or wrong about it passing, but I do agree with much of your assessment of the law- not necessarily the best for the majority of us. Regardless of what happens, it’s always smart to know what’s happening on the tax landscape so we can manage our money accordingly.
    Daniel Palmer @ Pennies and Dollars recently posted…10 Side Hustles a Kid Can DoMy Profile

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