Financial Friday: Income tax simplification #taxcuts #taxreform

Posted By on November 3, 2017

On Thursday, the long awaited Republican tax reform plan finally saw the light of day after most political and financial watchers haggled over the unknown details most of this year. taxreformgraphicPresident Trump has made tax reform and cuts as his centerpiece agenda as essential to growing the economy and stimulating job and wage growth for working Americans.

For years our government through higher than worldwide competitive taxes has driven business offshore and the use of a punitive tax code has hindered economic growth. As I said before, after seeing the anti-business climate over the past decade, there is no way I would have wanted to start a business; it is risky enough without having bureaucrats fighting against you. Besides the oppressive regulations most manufacturing businesses (mine was one), the complicated gamesmanship required to work within the law and file taxes hurt small businesses who were not savvy in their financial planning. Hard worker and risk takers saw their businesses struggle year after year not because they couldn’t do their primary job, but because they struggled to navigate an oppressive local/city, state and federal bureaucracy including taxes and paperwork that was stacked against them. [end rant … sorry about that]

The biggest instant economic boost is going to come from the proposal the lower business taxes from nearly the highest in the world (35%) to a competitive 20% rate. Small business, which often gets income passed through to individuals, also gets a break pegging their tax rate at 25% along with increase ability to deduction more of their capital expenses in the year they are taken (rather than depreciation over a long period of time). All of this should help owners and managers expand their operations and create new jobs … GOPTaxReformPlanand hopefully stimulate wage growth.

One of the much ballyhooed items has to do with US corporations who hold income in cash in their overseas divisions and wouldn’t mind bringing the money back to the US … but high US corporate tax rates have made this too costly. So there is a provision for them to bring their cash back to reinvest and be taxed at a 5% rate. These corporate changes should stimulate the economy and add jobs triggering a boost in wages for working Americans (at least that is the plan). Those in congress proposing this along with the Whitehouse are counting on a reduction in rates to be made up by the growth in US businesses, rising wages and increased employment through new jobs. We are likely to see continued higher corporate profits which are already being helped by both coming out of a recession and optimism that the Republicans will likely be far more welcoming for business – fewer regulations, lower taxes and USA first policies.

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On the individual tax side, there will still be a lot of number crunching if you are in the higher income brackets or live in the very highly taxed states. Almost ALL paying taxes in the lower to middle income ranges will definitely see tax savings and simplicity in filing with a doubling of the standard deduction and bigger Family Credit (expanding of the Child Tax credit). The new simplified proposal eliminates many of the long used deductions that lower taxable incomes … none more contentious than SALT (deduction for State And Local Taxes). The new proposal tried to balance offering up to a $10,000 deduction for real estate taxes, but eliminated the state tax deduction which favored high income citizens in state where taxes are high – CA, NY, NJ, etc. They just so happen to be Democratically controlled state = duh, supporters of higher taxes. Their only comeback is that their state receive less Federal compared to what their high earners pay to the Federal government. Personally I wouldn’t mind seeing those high taxed states feeling pressured to lower the tax burden on their citizens and/or Washington DC reducing what they "take" and "distribute" to states in order to keep them hostage to the federal governments’ demands.

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Graphics from FoxBusiness and a Ways & Means Tax Cuts/Jobs Act Highlights PDF

Comments

  • Aaron Howard

    Hi Uncle Rich. As you know, I enjoy reading your blog and hearing your informed and conservative leaning view on many important things, especially of a financial nature, to our country. I am certainly more left leaning than you are, but I respect your opinion, again, especially on concepts relating to money. I read this post with interest, but it left me with questions. First, I agree that corporate income tax should be reduced, and despite your thoughts on Obama, so did he (https://www.washingtonpost.com/business/economy/obama-to-propose-lowering-corporate-tax-rate-to-28-percent/2012/02/22/gIQA1sjdSR_story.html?utm_term=.d6f3a7cb90ce). However, I am extremely worried about how the deficit that this reduction will cause will be recouped? Over the next ten years, this cut would result in 1.9 trillion dollars in reduced taxes (http://www.crfb.org/blogs/big-6-tax-framework-could-cost-22-trillion). Sure there are loopholes that are going to be closed and cash brought back in (that 5% tax rate you mentioned), but all that only adds up to hundreds of billions of dollars, not trillions. You also focus on the stimulation of the economy as a byproduct of the reduced tax, but, if we are honest with ourselves, there is NO consensus that it does (or does not) stimulate the economy (https://www.cbpp.org/research/federal-tax/corporate-rate-cuts-are-a-poor-way-to-help-the-economy-and-most-workers-and or for a more empirical view: http://www.sciencedirect.com/science/article/pii/030439329390025B). Second, a philosophical view that many conservatives share is fiscal independence in the context of the government. In other words, we will do better financially if the government stays out of our way. But, then the republican tax bill increases the family tax credit?! Meaning that the republicans think that we should reduce government over site of corporations, but increase over site of families, the most private and personal aspect of our lives? I agree with republicans that families are the bedrock of our society, and we would all be the better if the government stayed out of them, including with regard to taxes. Third, I want to emphasize that this is not an attack on your view. Your posts just bring up so many questions to my mind and I wanted to express them and hear your thoughts on them!

    • Aaron,

      Love that you still read my musings and know you are far more progressive that many aging and more conservative types. I do my best to listen and debate with those who think a bit differently and wish our country could find a better way to blend the fiscal and social thinking — but compromise is unacceptable to the loudest on the left and right. I wish it were different. Please hammer me when I am off based and need some youthful enlightenment … I regularly enjoy the same back and forth with Taylor.

      I’m glad you have the fiscally responsible mindset when it comes to spending, borrowing and cutting taxes … I grapple with it too. Lately I’ve shifted only because cutting enough spending and balancing a budget is never going to happen seeing the only two options as a disastrous crash or growing the economy. Reducing regulations on business and cutting corporate taxes is probably the most effective for the later … but it also put the most money in the pockets of the investor class, creates a bigger wealth divide and likely abuses the environment; where is the balance? Still it is the way to grow the economy and try to manage the $20Trillion debt.

      As for “no empirical evidence” … I’ve read enough economics books to be dangerous … but have lived through tax cuts and punitive tax increases know it impacts how people and businesses react (the Fed does the same thing with monetary policy too). I suspect A LOT has to do with optimism or pessimism too. We spend and expand when we “feel” confident and pull back when faced with negativity. Kennedy made us believe in America (and cut taxes) and Reagan was visionary (and cut taxes) and as divisive as he is, Trump has working-class America believing they have a future (and is taxes).

      As for actually playing with the current special interest tax code, I’d prefer not designing plan that favored one group over another with deductions and credits (true free market plan would eliminate all) … but be real … there are some just so politically popular that it is suicide to eliminate, besides most politicians believe it is their duty to socially engineer (mortgage deduction, charity, dependents). Who knows what would happen to “giving” if the charitable deduction was eliminated? As for housing, the “American Dream” is homeownership and government love helping with the mortgage deduction (or FANNY & FREDDY … or student loans which just push the price of college higher [whoops, another time]). As for Child/Family tax credits, I was not a fan UNTIL I realizing two things: 1) Older adults requiring Medicaid (govt) in a nursing home is 10 times as expensive (if not more) than family taking care of family, so it really does pay for itself. 2) The only hope for our nation’s future is “growing” the next generation of workers and taxpayers. My later years depends on your generation and you will depend on the generations following you – we should talk expanding immigration to replace the boomers and millennials too.

      Thanks again for your thoughtful comments and included links. I really do enjoy reading and hearing how others think and evaluate what is best for our country and I’m sorry to be so long winded.

      • Aaron Howard

        Thanks for your thoughtful reply. While my first post was a bit pessimistic regarding policy, the biggest gripe I have with our government is partisanship and the lack of a willingness to compromise by the extreme factions of congress that have loud voices and are forcing many of the old guard out of office (via elections or retirement!). I also try to tell myself that with all that is wrong with our country there is still so much that makes America the country where I want to live (I WILL NOT say “Makes America Great”, and that is the only Trump dig I will allow myself).

        I will also say that I do appreciate the pragmatic process that you apply to your political views. As a scientist, I prize the use of logic in all aspects of life. (As a brief aside, I am very worried about our countries skepticism of science and the reason that is built into the methods it uses to answer very hard questions that NEED to be answered.) However, I have not experienced as many sweeping policy changes as you have, so I still hold out (perhaps unreasonable hope) that we can figure out a way to reduce our national deficit. And the idea of trying to out pace the debt with financial growth is a scary prospect to me.

        As for immigration, that is one where I think the pragmatic view is best. There is NO WAY we can removed the over 10 million (?) undocumented immigrants, and, as you said, immigrants (documented or otherwise) are critical to our workforce. More philosophically, we are a nation of immigrants! Immigrants coming to America for the hope of democracy is one of the aspects of America I am most proud of. Unfortunately, xenophobia has existed in this country since its start. We’ve hated the English, the Irish, the Germans, people of Asian descent, and other groups at various points in our history. Now, we look back on those times with shame, and in the future I think we will look back on today with very similar feels regarding how we are treating Latino and Muslim immigrants.

        • Excellent reply Aaron … although instead of saying “it,” you could always shorten “it” to #MAGA? 🙂 Likely we are in agreement to some degree with the lack of compromise and “old guard” … or as someone recently elected to office might say, “the swamp” … but somehow that would probably ruffle the feathers of someone with progressive views?

          We definitely need to address the immigration issue and need to work on our “melting pot.” About the only consolation is that we have always struggled with xenophobia and have at least handled it better that most other nations. (Humor: Surprised that your list of “groups” excluded Gma H’s Swedish v Italian 20th century Jamestown prejudice?)

          Again I appreciate your comments and the fact that you keep checking out my blog. Speaking of that, I started a book by a science guy, Dr Francis Collins (misplace it … I think I left it at Katelyn and Drew’s???) and am curious if you have ever had the opportunity to hear him speak, read his work or form an opinion? Perhaps as a non-science guy, I’m attracted to his insight as a way to help blend science and faith a little bit better?
          http://mydesultoryblog.com/2017/09/an-interview-with-dr-francis-collins-triggered-a-book-order/

          • Aaron Howard

            Francis Collins is an interesting fellow. I know some about him. I have not read his book, but I became aware of him back in college (probably around 2004-2005). He was appreciated by some biologists at Grove City College, though his relatively scientific worldview (theistic evolution) and rejection of the young Earth and Intelligent Design made him unpalatable to most at GCC.

            Counter to that, the importance of faith in his personal life does ostracize him from most of the, 99.9% atheist, biological community. For a long time I wondered how he became head of the NIH, but then I learned it was a political appointment (by Obama!) and I was less surprised. If it was a choice made by other biologists, my guess is he would never have gotten the job.

            I very much appreciate his open mindedness and willingness to “get it” from both sides. Whether or not I think his worldview is “correct” is not for me to say. As a biologist, I am not trained to assess worldviews, faith-based or not, which you may take as a criticism of him. As a human being, I think faith is an extremely personal thing that is the purview of each individual.

Desultory - des-uhl-tawr-ee, -tohr-ee

  1. lacking in consistency, constancy, or visible order, disconnected; fitful: desultory conversation.
  2. digressing from or unconnected with the main subject; random: a desultory remark.