Tax reform is a giant roll of the dice
In a state of desperation from a year where no significant legislation was passed, the 115th Congress of the United States of America will seemingly pass a wide-ranging tax reform law.
The original version passed the House of Representatives on Nov. 16, and the Senate passed its version on Dec. 2. After minor reconciliation, the president will likely be signing the bill into law in short order.
Having spent a great part of the last two days reading and outlining the proposal, which was posted online Friday, Dec. 1, I have come to some unavoidable conclusions. Primarily, for a positive effect to be yielded from the proposed changes in the tax code, certain economic trends will have to be propelled by this specific type of tax restructuring. Repatriation of monies held overseas and the homecoming of manufacturing would have to come to fruition for this questionable effort to succeed.
That historically has not happened in the past with this kind of tax reform. A comparison of the results of the old law and the hope of the new law, that is its successor, bears an unfortunate conclusion. The presumption of grand economic growth is likely unrealistic.
Secondly, whether or not the tax reform spurs the economy sufficiently, the top wealth holders will benefit greatly. On the contrary, the middle and lower classes will lose ground if the basic economic theory expressed in the writing of this bill fails.
The 479 pages of this bill are filled with intricate and perplexing facets. Simply, this tax code reform proposal is a labyrinth. Nevertheless, I will attempt to clarify what this change in the law will mean to you and me.
The “Tax Cuts and Jobs Act” will essentially succeed the “Tax Reform Act of 1986” informally known as the Reagan Tax Cuts. However, there are major differences between the two laws. The most glaring difference is how the laws were honed. Back in ‘86, the effort was a bipartisan one which not only involved participation from both party’s members, but there were also a number of hearings in various committees before the final proposal was rendered. Even with the two major parties hashing out the bill, the overall long-term effect was mediocre at best.
In the case of the current legislation, the Democrat elected officials were exposed to the bill a few hours before the vote. Further, the draft copy the Democrats were given was a scratch copy with numerous hand written comments and modifications scrawled in the margins. Thirty years ago, our elected representatives had three weeks to scrutinize and intensely study the prospective law before voting.
Interestingly, the Republicans criticized President Obama and the Democrat majority congress for not including Republicans enough during the formulation of the proven imperfect “Affordable Care Act” (ACA). Yet, they followed the same imprudent avenue themselves. Even though history has taught us that single-party rammed through legislation had usually become failed laws in practice.
In summary, the Tax Reform Act of 1986 (TRA) was presented as a simplification of the tax code. Alas, the reality was much more complicated. The TRA was designed to be tax-revenue neutral. Unfortunately, the resulting effect was a ballooning of the deficit. The mal-effects of the TRA had to be addressed by Reagan’s successor George H. W. Bush. This sad reality resulted in the 41st president having to break his “no new taxes” campaign pledge in order to keep the government running. Arguably, this tax revenue dilemma may have cost him the 1992 election.
The Tax Cut and Jobs Act (TCJA) is estimated by both the Congressional Budget Office and the Tax Foundation to add between 1 Trillion and 1.5 Trillion to the country’s indebtedness. The existing National Debt of 20.6 Trillion will soon eclipse the Gross Domestic Product (GDP), which will incur a mandatory curb to discretionary spending. Hence, this revision in the law will make our already fragile national financial situation much more tenuous.
The hope that lawmakers had back in 1986 is the same hope that they have today. Simply that enough economic growth will counterbalance the tax cuts, which substantially benefit the affluent. According to Forbes, 4/10 of 1 percent in economic growth is equal to 1 trillion in tax revenue. GOP leaders are hoping that, by imposing these measures, the American economy will increase its overall growth by at least 1 percent. After the changes in ‘86, the economy grew 2/10 of 1 percent and then fell into stagnancy. Consequently, this effect of lackluster growth partially caused the increase in the national debt.
So, inevitably, programs like Medicare, Social Security, Federal funded Public Assistance will all have to be cut back to accommodate the corporate tax cuts and advantages to the upper echelon resulting from the TCJA.
Moreover, cutbacks specific to the ACA regarding tax credits in the purchase of medical insurance will directly result in 13 million people dropping their coverage due to lack of affordability.
Generally, the following is a synopsis of how this reform will affect business and the individual. In regard to business, the most auspicious cut is the reduction of the corporate tax rate from 35 percent to 20 percent on all corporations, excluding personal service corporations (PSC). A PSC would pay a 25 percent tax rate. The aim is to try to induce expatriated companies to return to North American shores. What has not been mentioned in this aspect is that between 2005 and 2015, American corporations paid an average of 13.8 percent in corporate tax because there are deductible offsets like research and development allowances that lessen the liability. Some corporations paid nothing at all depending on the expansion loopholes and other offsets.
The hope is that corporations, who by their nature do not have access to these tax-diminishing business characteristics, will set up shop here at home now that the overall rate is lessened. Thus, this will produce an uptick in employment opportunities. Hopefully this tactic will work.
Additionally, businesses will be allowed to increase expensing of certain business properties. This might encourage business investment, equipment purchase and expansion of domestic businesses. These changes are permanent in the new law. Conversely, the tax reform advantages pertaining to an individual taxpayer sunset in 2025.
Regarding that individual taxpayer, the tax brackets which are presently seven levels ranging from 10 percent to 39.6 percent will be reduced in the number of brackets and will range from 12 percent to 38.5 percent. The individual standard deduction will double to 12,000 or 24,000 if filing jointly. However, itemized deductions will be limited and, according to the Tax Foundation’s Analyst Scott Greenberg: “Taxpayers with large amounts of itemized deductions, some of them could see a modest tax increase.” Hence, the middle class taxpayer could lose money.
Also, the “Joint Committee on Taxation” (JCT) states some foreboding statistics. Under the TCJA, they assert that by 2027 all earners who make 75 to 110 thousand dollars in gross income will actually realize tax increases. In the short term, taxpayers who earn that same gross income will realize a tax savings of between $1,100 and $1,300 per year on average. Those earning between 52 and 75 thousand dollars will realize between $500 and $800 on average in tax savings per year. Those earners who make between 25 and 52 thousand dollars will realize a few hundred dollars in tax savings at best. If one earns below 25 thousand dollars, whatever liability one has will remain about the same.
But if you are rich, hold on to you hats. Because of the changes regarding the commercial property tax, your liability will be reduced by an average of two-thirds by way of changes in the depreciation deduction and the elimination of the closing tax. And the estate or “death tax” allowances have been substantially raised. This change makes the transfer of property, in inheritance, tax-free up to a new 11 million dollar threshold. This revision greatly benefits the top 9 percent of wealth holders.
According to the New York Times, this will mean one billion dollars in tax savings to the Trump family long-term.
Furthermore, according to MSNBC, 90 percent of the taxes reduced by this tax code reform will benefit the top 11 percent of wealth holders in America. To call this reform package a middle-class tax cut is a misnomer.
Whether this type of tax reform will truly stimulate the economy is a giant roll of the dice. Considering a similar plan had lackluster results three decades ago, one is inclined to be apprehensive. For good or for ill, at least the 115th Congress will finally get something substantial passed.