TAX REFORM: Some Facts and Opinions
I have been a registered Independent for over 40 years. Although I voted for President, I did not vote for Trump or Clinton. I believe I am without bias.
I was Attorney-Advisor for Tax Policy to Treasury Secretary Simon during the Nixon Administration a Chair of the Tax Department at the 1200 attorney Paul Hastings law firm. I know a little about taxation and tax policy so I want to take this opportunity to objectively provide some thoughts on Tax Reform.
Tax Reform legislation will probably be enacted before year-end. It’s a very complicated (500 pages) transformational law – one that completely reshapes the tax code for the first time since 1986. As a Republican revision – it will probably pass the Senate with 51 or 52 Republican votes and no Democratic votes. No normative judgment, just the facts.
Public support at 32% seems low. That’s the same percentage as Trump’s approval rating. One reason might be that the legislation does very little for the “middle class,” with 62% of the economic benefits going to the top 1% of wage earners.
In 2018, tax savings will be low for most people - $1,000 to $2,000 – for the year. By 2019, the vast majority of people earning $200,000 or less will see their taxes increase. 6 of the 7 tax brackets will be lowered (including the top bracket from 39.6% to 37%) and the standard deduction doubled from $1,200 to $2,400, which will reduce the number of people itemizing their deductions from 19% to 5% thus “simplifying” the tax code. However, the “caps” on the deductibility of State and local taxes will offset the savings for individuals ($10,000), property taxes ($10,000), and mortgage interest ($500,000).
Individuals aside, corporate taxpayers will benefit from the tax rate reduction from 35% to 21%. This will create an “asset bubble,” as many large corporations are already cash rich from earnings and borrowing is historically inexpensive. The lower rates will dramatically facilitate the repatriation of warehoused earnings from abroad (eg. Ireland).
One provocative question is the deployment of this multi-trillion dollar hoard of capital. Will corporations reinvest it to expand business activities; raise wages; buy back stock; raise dividends; etc? And, why didn’t Congress take this opportunity to incentivize monetization to “Make America Great Again.” What use will do the most good?
Whatever your view on the above, Tax Reform has a cost. The estimates are between $1.5 and $2.4 Billion over the next 10 years, assuming the temporary benefits are allowed to expire. Just like the Bush cuts in 2001 and 2003, the will not expire.
According to the Congressional Budget Office, the national public debt is at $15 Trillion. That’s 77% of gross domestic product. Think about that. What if 3/4th of your pre-tax earnings went to pay your bills? Most people would not have any net income.
My opinion, for what it’s worth, is that this is a very bad law.