We have the next piece of major legislation coming out of the administration and that is centered around tax reform. I did not fully support the healthcare bill as it did not contain any provisions to control the price of drugs but I fully support this tax bill. From what I can see it does everything you can ever ask for in tax reform. One of the difficulties with bills like this is that very few people know what is exactly in it but everyone discusses it. As best I can I will go over what is in the bill and then I will go over the complaints people have against it.
- Lower tax rates overall. The top rate is lowered to 33% from almost 40% and most deductions are removed. Standard deduction of 30000 for joint and 15000 for single. Incomes up to 15000 pay 0. New childcare related deductions. Maximum deduction is 100000 for single and 200000 for joint. Carried interest is taxed as labor and not capital gains.
- Estate tax is gone. Capital gains held at death are taxed.
- Corporate taxes get cut from 35% to 15%. Owners of S corps, single props, and partnerships can have their income taxed at 15% instead of income tax. Limiting the number of things that can be claimed as expenses.
- Tax on unrepatriated earnings. 4% for most 10% for cash.
The 4 bullet points summarize the entire tax plan. I left of the commentary until now so you could see and judge the plan for yourself. If there are any points I missed feel free to reach out.
- Estate Tax – I could write volumes on this alone. Instead I ask you to do one thing. Google how much Steve Jobs paid in estate taxes when he died. The number rhymes with hero. The truly wealthy do not pay estate taxes. You have an entire industry of people who are wealthy and well-connected in their own right who make sure that they do not pay this tax.
- Tax for Repatriation – If there is any part of the tax reform bill that has universal support this is it. Everyone knows we have unreported income for our corporations abroad. There is literally no other way to get this money.
- Corporate Taxes– The democrats are going after this hard and spinning this as a tax cut for the rich. On paper it would be true. 35 percent to 15 percent halves their tax bill. The democrats don’t want to tell you that no one actually pays 35%. If corporations actually had to pay this amount we would lost businesses to inversions at a faster rate that we are losing now. Studies differ on what businesses are actually paying. Some say that it is 12% others go as high as 16%. None of them are anywhere in the neighborhood of 35%. Even with our current real tax rate we are already losing businesses to inversion. Apple being the most famous one. If the corporate tax code is not fixed we will continue losing them. The most frustrating part of this whole ordeal is the people who are against fixing the corporate tax code are also against any nationalist or protectionist policies to keep businesses in America which leaves us with exactly zero options to deal with the problem.
- Income Taxes– This is where the whole tax cut for the rich angle falls apart and it is understandable that democrats do not mention this. First off the floor for income taxes has been raised to 15000. That means a lot more people will not be paying taxes at all. Remember we have a progressive tax system. Keeping 15000 means a whole lot more to someone earning 50000 a year than it does to someone earning 300000 a year. More importantly a lot of the deductions are going away and there is a major push to get everyone to use standardized deductions by raising them. Who do you think benefits when you push standardized deductions? The people with lower-income who can barely make ends meet or the people with more money to spend? Higher standardized deductions are a massive benefit to the poor and middle class and may actually cause the highest earners to pay more. Lastly the carried interest loophole. For the longest time investment managers, among the wealthiest in the population, have gotten away with paying capital gains instead of income tax. The tax plan ends this and classifies it as income tax instead. Has anyone ever brought this up when they say it is a massive tax cut to the rich?
There is a lot of talk about whether the tax plan is supply side or demand side. The descriptions do not fit the plan best. It is a realist plan. It takes the portion of the tax code which is the most often and aggressively exploited and removes them pushing for standardized deductions instead. There are two main benefits of this plan. First the standardized deductions and the higher floor let the middle and lower-income families keep more of their income and it levels the playing field between the huge corporations and the small businesses. Rich corporations like GE can afford to hire the best tax attorneys and accountants to make sure they pay no taxes while smaller business cannot do this and have to muddle along the best way they can. Simplifying everything means that both of them will pay an equal percentage.
There are two major complaints with the tax plan and they both stem from the same idiocy. First that the tax plan will lower revenues and increase the debt and second that it is a massive tax cut for the rich. The “experts” who claim this do present a lot of figures to back them up. The only problem with these figures is that they assume that people actually pay the tax rate on paper. After all if studies show the tax rate that people corporations actually pay is 12-15% and you lower the rate to 15% how is it a tax cut? If the government is only collecting this much now how will collections go lower if you collect the same amount?
The most insidious thing about these “analysis” is that almost to a man the people doing them are tax lawyers and accountants. The people who make their living making sure that companies and wealthy individuals pay next to no taxes are claiming that this tax plan is bad because they do. It is hard to blame them. If you simplify the tax code then their industry will be in danger.