Saturday, November 4, 2017

New Tax Plan -- Fair or Not Fair

     If I had to bet, I would bet that the proposed Republican tax reform bill does not get passed, that it never actually makes it into law. However, I also know I am not very good at predicting the political future, so let me put in my two cents' worth about the tax reform proposal ... what it proposes, and whether it's fair or not. My information about the proposal comes from U.S. News, which I assume is accurate but not necessarily comprehensive.

     First of all I agree that the tax code ought to be simplified. Does this proposal accomplish that? Well, it reduces the tax brackets from seven to four; it raises the standard deduction so more people will be able to file without having to itemize deductions. Perhaps it's a small step in the right direction. But it FALLS SHORT in accomplishing a true simplification that would allow the majority of people to understand the code and do their own taxes.

     The most-advertised change is the lowering of the business tax from 35% to 20%. People will argue all day long about whether or not this is a good thing. Proponents say it will spur investment, jobs and income. Opponents argue that it will add to the federal deficit and that most of the benefits will go to the rich. The truth is, NOBODY KNOWS what the effects will be. So it's hard to say whether this is fair or not.

     The current seven tax brackets will be reduced to four, ranging from 12% to 39.6%. The highest rate has not been reduced. So ... FAIR.

     Certain deductions are capped. The mortgage deduction is currently capped at $1 million. In other words, mortgage interest is tax deductible up to the interest paid on a $1 million loan. The proposal calls for lowering the cap to $500,000. Despite howls of protest from the real-estate industry, this only seems FAIR to me. I think it's a good idea for the federal government to encourage home ownership, because it is generally considered a social good. But come on. There should be a reasonable limit on how much the rest of us subsidize people buying million-dollar-plus McMansions, don't you think?.

     The other cap is for state and local property tax. Currently, all real-estate tax is exempt from federal income tax. The proposal calls for a cap at $10,000. In effect, this increases taxes on people living in wealthy areas, who benefit from the extra services their $10,000-plus property taxes pay for. Again, I think we should subsidize local governments, particularly local school systems. But there's no reason why regular people should subsidize other people's $10,000-plus luxuries. So ... FAIR.

     The Republican tax plan would eliminate the tax credit for buying electric vehicles. FAIR, BUT NOT SMART. It would eliminate deductions for state and local income taxes, casualty losses, medical expenses (currently deductible at over 10% of income); alimony payments and moving expenses necessary for a job. To compensate the Republican bill would almost double the standard deduction from $12,700 to $24,000 for a married couple and from $6,350 to $12,000 for single filers. It would also increase the child deduction from $1000 to $1600, but eliminate the personal exemption. On balance this would benefit families and punish single people, but the effects would be minimal. So all this pretty much comes out in the wash, and simplifies the tax code. FAIR.

     The plan would also eliminate the alternative minimum tax -- originally designed to make sure the very highest-income individuals pay at least some tax, even if they pile on the deductions and other tax dodges available to those with high incomes and high-priced accountants. But the AMT has morphed into a complicated add-on that now affects not just the super-rich, but also significant numbers of upper-middle-income filers. FAIR.

     The plan would not eliminate the so-called carried interest clause, which offers select financial executives a huge tax break by classifying their income as capital gains instead of regular income, thus taxing it at a lower rate. Donald Trump railed against this tax break during the campaign -- as did Hillary Clinton and Bernie Sanders and virtually every other candidate. But despite the protests, this particular tax break for the favored few has not been eliminated. NOT FAIR.

     The plan would also phase out the inheritance tax (or the death tax, in Republican parlance). Currently, estates worth over $5.5 million are subject to estate tax. Under this plan no estate tax would be levied on even the wealthiest of the wealthy. NOT FAIR.

     One last thing. There was talk of putting more severe caps on the amounts people could put into their 401K accounts. This element was dropped. So workers will still be able to deposit up to $18,000 in a 401K account. Yet people who do not work for a big corporation, who do not have a 401K, and instead rely on an IRA, are limited to a $5,500 contribution (or $6,500 if you're over 50). In my opinion, everyone should have the same caps on their contributions. Everyone should be treated equally. So ... UNFAIR.

     As I said, I do not know if this is a comprehensive look at the new tax plan, but it covers the basics. Some good things; some bad things. But is it progress? The beat goes on.


Stephen Hayes said...

I'm against this bill because of the trillion plus dollars it would add to the deficit. Republicans squawk loudly about the deficit when Democrats add to it but when in office they spend like sailors on shore leave.

DJan said...

It seems to favor the wealthy and increase the disparity between haves and have-nots. The other thing is that the huge decrease in corporate taxes doesn't make a whole lot of sense to me when it means increasing the deficit so much. I fear that it means Medicare and Medicaid will be the inevitable losers here. :-(

Anonymous said...

It is not progress. The Grace Commission (1984), Simpson Bowles (NCFRR 2010), Gang of Six (on National debt 2011), and the GAO’s Long Term Fiscal Outlook all say similar things. In a nutshell….The USA must cut spending and must increase taxes. This tax reform bill makes no sense to me especially since I couldn’t find any study that remotely suggests that the USA can grow the GDP enough to out run the burgeoning national debt. This tax reform bill looks like it really helps the very wealthiest Americans and does nothing to solve the gravest of our future financial problems (Social Security, Medicare/Medicaid, and interest on the national debt). Everyone should read this document. You can bet that everyone in Congress has. Congress just refuses to do anything about it…..and they have refused to act for the last 20+ years. Term limits would probably be far more helpful to the USA than this “tax reform” bill.

Tom Sightings said...

Wow, I didn't realize people were so worried about the national debt. It concerns me, too, but what do we do about it? If we cut govt. spending and increase taxes I fear we would have the mother of all recessions.

Linda Myers said...

This plan would not hurt me and my husband. But it's still galling that the wealthy will benefit. Why do they need more money?

Anonymous said...

Tom….we are fortunate to be the reserve currency of the world. Maybe the rest of the world will tolerate us going up to $35- $40 trillion in debt but I doubt it. If we weren’t the reserve currency of the world, world markets would have disciplined us (through much higher interest rates) years ago. Maybe we are also fortunate that most of the world has massive debt too. I’m concerned enough that I have decided to starting taking Social Security in the next few months rather than take the usual financial advice of wait until you turn 70. Curtailing spending and increasing taxes….slowly….would result in a recession but the alternative could be a total collapse of the US economy and the USD as we know it when countries stop buying our debt or demand higher interest rates. Is the world really going to wait around for our grandchildren and great-grandchildren to pay off $40 trillion? How would they even be able to pay for that? One thing is for sure, the Federal Reserve doesn’t dare increase interest rates to what they consider “normal”, historical rates of 4-6%. The increase in rates would consume more Federal revenues….resulting in what? More borrowing? You can’t raise interest rates on all of the debt US citizens already owe privately (mortgages, student loans, consumer debt) without triggering a recession as well. Our current economic “plan” says we all must continue the buy, buy, buy. We would need unbelievable inflation to forestall this mess for awhile. Congress just buries their heads in the sand but I really don’t believe many of them care about anything but themselves.

Janette said...

The majority of my family (brothers, sisters, children and us) would do very nicely with this plan. In fact, most of us would pay less. My daughter would break even - mostly because she lives in a high tax state and will not be able to write it all off---but she understands that their income is much higher as well. It is all a balance.
I agree that the inheritance tax over $5 million should stay---for regular money....but then there is always the family farm where the person who dies without a will and it is valued by the court at a higher value.(which is something my extended family - who are farmers- point out). Maybe a clause for that group?
The 401 vs IRA has ALWAYS irked me. We have never qualified for a 401. Most of our assets are in regular cash, because of that glitch. It, completely, favors one class of people.
Corporate tax rate? I am willing as long as all that money floating overseas comes home. I hear that Apple, alone, is already making plans to "repatriate" 2.9 billion.
I hope they pass it. It can be tweeted later.... My congressman is voting party not constituents. That tics me off....but there are few independents in the state that I live in and we have NO voice.
As far as the debt. I used to worry. I don't think that we can fix it. Kick it down the road.

Barbara said...

I agree with Lynda Myers. As far as I can tell the change will be small for me as a single, retired person. However, things like eliminating the inheritance tax -- whose family besides the Trump family does it help. And for goodness sake let's be sure the Waltons (Wal-Mart owners) get their fair share of deductions. They are separately, not together, some of our nations richest.

Olga Hebert said...

I don't understand why the "base" resents every dime that goes to a single mom struggling to feed her children but does not seem to care at all about welfare for the wealthy.

Tabor said...

A Congressman posted a link for a quick look at how your taxes might change with the new bill. You input on a few totals from last years taxes. I will end up paying about $200 more in taxes if the bill passes. I am upper class in income. I knew this, but fail to realize it because I live in an economic bubble. I used to be very poor and it is hard to go back there. I donate lots (well I could donate more but am terrified of the market bubble) to pay for my guilt. I also am more concerned about the deficit. If there is no income to run the social services of a country it will trickle down to your local environmental office, your local police station, your local health services and you will not be happy no matter how simple the tax form is.

Trudi said...

>Why do they need more money?

Linda Myers.... "need" has nothing to do with it at very high income levels. If their taxes are reduced or increased by $10,000 they will not notice. Do not be concerned that they will have to rent out rooms in their mansions to pay for their taxes.

Also many corporations are using totally legal dodges... or moving overseas... so their actually corporate rate is near 0%! Lowering the rate from 39% to 20% is not going to change how much they contribute to supporting the infrastructure that they use. You and I will continue to pay for it.

Janette said...

Olga, the poor's tax rate will be zero.

Rebecca Forstadt Olkowski said...

I agree that taxes need to be simplified. Right now it's insanely complicated but I'm sick of these bills getting thrown together quickly simply to get a win. I don't think it will pass either. Also, the price of homes in one area differs significantly from others depending on where you live.

Kathy @ SMART Living said...

Hi Tom! Good for you for tackling something so sticky! I am in the camp that is hoping this will not pass although at the present I don't think it will affect me too much--at least right away. But anyone who doesn't think the growing national debt won't come back to haunt us is very short-sighted. I don't have kids but anyone with children should be shaking in their boots for what will happen down the road. And eliminating write-offs for student loans? Are they crazy. Students with nothing left to lose will the first ones to actively protest and stage a rebellion. And anyone remember what happened in Kansas when the Governer eliminated income taxes for businesses to "stimulate" it's economy? It just about bankrupted Kansas. Besides, I would love to send another message to DT and the GOP of how they are failing the American people. ~Kathy

Barbara Radisavljevic said...

That's a lot to chew on. We are retired and earn our living from rental properties and social security. I'm not sure yet how this will affect us, but we live in California, so state income taxes might be a concern. We no longer have mortgages, just a home equity line of credit. It's medical costs, even with Medicare, that are troublesome. We had to pay over 20,000 out of pocket for dental expenses alone last year. Medicare doesn't over that or vision.

Keep the Faith said...

Some of this sounds reasonable, but my fear is the GOP trying to get money from Medicare, SS and Medicaid over the years to balance the tax breaks especially for corporations and the ultra wealthy.

The GOP is saying that won't happen because the economy is suppose to grow enough (fantasy thinking) to cover the tax breaks but there is no guarantee that corporations and the wealthy will trickle down their wealth. Corporations have lots of cash on hand already and don't need the break. If they get the tax break, they should only receive it if they bring their companies back from overseas along with the profits that aren't taxed. Ultra wealthy can afford to pay more without feeling a pinch. No need to protect them.

I guess it about whether the GOP can be trusted (not) with your money to do the right thing. I have serious doubts.

James Engler said...

I usually enjoy your blog but now I'm a little concerned about your bias. Your last blog concerning the tax bill maybe a little bias as well. You mentioned that most of your info came from US News. I assume that is the same source owned by Mortimer B Zukerman. A little research reveals that Mr. Zukerman is a avid democratic who was very involved with the Obama administration. He even was a speech writer for the aforementioned Obama. Maybe you should stick to "sightings" until you can be a little more objective.

Anonymous said...

I prefer 1,3,6, and 11

Overall, clean white water and sand vs. yellow overtones (#1 and 3) are my preference and vertical lines in 6 and 11 (plus lean white) are more interesting and dramatic.