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’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