The Truth About the Trump Budget

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The Democrats are up in arms about the Trump budget. Cruel, Barbaric, Mean are some of the nicest words they have used to describe it and it just goes downhill from there. As usual the spokespeople of the Trump administration have not been able to defend the budget effectively so it falls upon independent bloggers like me to get the truth out the best I can. On a side note I am convinced Trump would be better served if he outsourced his messaging to independents , 4chan, and reddit. We would do a better job than his current team.

The primary line of attack the democrats are using is that President Trump is cutting 800 billion dollars from Medicaid therefore he is throwing grandma off a cliff. This is not true. The budget actually adds more money to medicaid and other entitlements every year. This is what is actually happening. There is a projection of how many people would be enrolled for Medicaid in the future and that medicaid would need a certain amount of money in the future. If you allocate less than that then the democrats deem it as a cut. If you are on medicaid this year and next this will not affect you.

Philosophy

The philosophy behind the budget plays a major part in the conflict here. When democrats and republicans make a budget they expect that the amount of people seeking entitlements will increase or stay at the same pace that they are now. When Trump and sane republicans make a budget they expect that this budget will help people earn more money and therefore this will reduce the number of people who rely on entitlements or at the very least slows the growth of the enrollees.

The budget is the blueprint of your plan for the economy. It is what you would like the economy to achieve. With the plans they present if the democrats are successful then you would have more people enrolled via welfare than ever. If the Trump plan is succesful then you would have fewer people enrolled for entitlements. Remember the budget is only supposed to be for one year. If it turns out the projections are not working then you can always add more money in the future. In essence the democrats want people mired in poverty and living of entitlements while Trump and sane republicans are taking a risk to lift them out of it.

Debt

At this point in the conversation it is usually the Republicans that cry out. What about the debt? If the plans to remove more people from entitlements fail then the deficit will be higher than ever. This is true, but then so what?

One thing that republicans don’t like to admit is that if Romney had won the debt would still have gone up. It may not have doubled like it did under Obama but it would still have gone up. If you put the most committed deficit hawk in power during the time of Obama the debt would have still gone up. At the end of the day any meaningful attempts to tackle the debt and deficits will have to go through entitlement reform. That is only possible if people are earning enough that they get out of it and are able to look at it objectively. Presiding over 8 years of supposedly massive growth while ordinary people have the same income they did when your massive growth started will not help it. If we have budgets that promote the status quo where we add more and more people to welfare then nothing will change and the problem will get worse. At some point we have to take the risk and try to lift people off poverty so they no longer need entitlements. Only then will they agree to change it.

Stimulus vs Tax Cut

Everyone democrat who was wildly applauding the stimulus by Obama is now staunchly opposed to the tax cuts by President Trump. The tax cuts and stimulus achieve the same thing. They stimulate the economy by making more money available to people. In the stimulus companies were able to stay open and keep paying their employees while others were able to expand and with tax cuts the same results are achieved.

There is one major difference that has to be pointed out. With the stimulus you gave all the benefits up front. Each company was handed a sack of money from the Obama administration. If the companies did not live up to their end of the deal then there was nothing Obama could do. Incidentally this is also the problem a lot of people have with the Iran deal. Tax cuts are different. They are not sacks of money to be handed out but rather promises that we will not take as much of their income in the future. It is implied that we are doing this so they can employ more Americans and offer higher wages. If this does not materialize then we can always remove the tax cuts.

In the past tax cuts were given but America was not a competitive place to invest in. Companies instead invested in India, China, and other countries. In effect our tax cuts funded their growth. To be completely fair with the corporations it is very hard to invest in a place that says on paper it will take 39.1% of your profits when other places say they will only take 15-20% sometimes less. It is time we used tax cuts to fund our growth.

The Trump budget is good enough. Something needs to be done to attempt to lift people up from poverty. If we keep doing what we have done before we will only achieve the same results.

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The Trump Tax Plan and You

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In my previous article I broke down the major changes to the tax code that Trump is proposing and showed that the major beneficiaries would be the poor and the middle class. One of the difficulties with tax is that sometimes abstract arguments do not work and we have to see how it benefits us directly. For today I will try to list some scenarios to show how it would benefit people at different income levels.

Before I begin I realize that every person is different so it is very unlikely the scenarios I offer will match your situation directly. You may have some additional credits or deductions I do not list. There are two facts that I want you to keep in mind as you go thru this. First in 2016 75% of all people who filed income tax opted for standardized deduction not itemized ones. Second in 2016 almost half of Americans working made 30000 or less.

Scenario 1: Single Making 30000

This would most likely describe a younger person starting out. Under President Obama the standardized deduction was 6300. You would subtract that from 30000 giving you a taxable income of 23700. This puts you in the 15% tax bracket. Your first 10350 would be untaxed. The next 9275 at 10% and everything else at 15%. Under Obama your tax liability would be 1538.75.

Under President Trump your standardized deduction would be 15000 giving you a taxable income of 15000. This would place you in the 15000 tax bracket which means you pay 0%. Your tax liability would be 0 under President Trump.

Scenario 2: Joint making 45000

This would most likely describe a struggling family. Under President Obama the standardized deduction for joint filers was 12600. If you subtract this from 45000 you get a taxable income of 32400. The first 10350 would be untaxed. The next 9275 would be at 10%. Everything else at 15%. Under Obama your liability would be 2843.75.

Under President Trump the standardized deduction for joint filers is 30000. Subtract that and it leaves you with a taxable income of 15000. This puts you in the 0 tax bracket which means you pay 0 under President Trump.

Scenario 3: Single making 60000

Estimates for what make you middle class vary by city. The average I got is 60000. Depending on where you live this could be higher or lower. Under President Obama your standardized deduction would be 6300 leaving you with taxable income of 53700. Like earlier the first 10350 is untaxed. The next 9275 at 10%. The next 28375 at 15%. The rest of the 5700 at 25%. This gives you a total liability of 6608.75 under President Obama.

Under President Trump you would have a standardized deduction of 15000. Leaving you with a taxable income of 45000. The first 15000 is untaxed. Everything else is at 12%. Under President Trump the liability of a single middle class person would be 3600. Almost half.

Scenario 4: Joint Making 100000

The average for a middle class family seems to be 100000. Under President Obama you would have a standard deduction of 12600 leaving you with a taxable income of 87400. As always the first 10350 is untaxed. The next at 9275 at 10%. The following 28375 at 15% and the remaining 39400 at 25%. Under President Obama the liability of this middle class family is 15033.75.

The same family under President Trump would have a deductible of 30000 leaving taxable income of 70000. The first 15000 is not taxed. The next 37500 gets taxed at 12% and the rest at 25%. Under President Trump the liability of the same middle class family would be 8875.

As you can see for most people earning 30000 and below they would find themselves paying no taxes and for the middle class would have their tax burden halved.

The Tremendous Tax Plan

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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.

Contents

  • 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.

Commentary

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.

Complaints

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.