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Thoughts About Tax Reform

473599108I am not an accountant nor am I financial advisor. I do not play one on TV, and I didn’t even stay at a Holiday Inn Express last night. So, accept my ideas in this Struming as those from someone who has general wisdom and a good business sense, but not someone who is in the weeds on tax codes.

To summarize, here are the highlights of the House version of the proposed tax changes:

1. The corporate-income-tax rate would be reduced to 20% from 35%, and pass-through business income would be taxed at a maximum rate of 25%

2. Reduces the current seven tax brackets for individuals to the following four: 12%, 25%, 35% and 39.6%.

3. Many itemized deductions would be eliminated. For individuals, the mortgage-interest (for current homes), charitable deductions, as well as the property-tax portion of the state and local tax deduction (capped at $10,000) would remain, but other itemized deductions would be eliminated, including state and local taxes, and medical expenses in excess of 10% of income, relevant to those with serious out of pocket medical expenses.

4. The standard deduction would be almost doubled, which would benefit about 70 percent of Americans who utilize this tax break rather than itemizing deductions separately.

5. The estate tax would be repealed after six years.  The plan immediately increases the exemption to $10 million

I see good and bad in tax reform, and we would all be wise to recognize it for what it is.

Good

1. Tax simplification—This is an idea that Republicans, Democrats and even members of the Whig party can embrace. The tax code is so complicated that who be the person who doesn’t use an accountant. A simpler code will result in the lesser need for accountants to prepare one’s taxes. How did ever get so convoluted?

2. Estate reform—Providing larger limits for estates before taxing them is smart and recognizes that an estate of several million dollars is not as rare (though hundreds of millions of dollars is another story)

3. Corporate tax relief—35% corporate tax rate is heavy and some reduction should help keep business in the U.S.

Bad

1. Increased debt—I thought the GOP was the party that saw the deficit as an evil creation of the Democrats. This program would result in piling on a larger debt (which will add interest and drive up debt service)

2. Overall Fairness—This program is not geared to the “little guy” as being sold. The estate reform portion clearly targets only the wealthy. The corporate tax relief clearly is a nod to the Fortune 100 whose profits and stocks have performed very well. Also the alternative minimum tax (AMT) is eliminated which forced most higher income earners ($200k+) to pay a higher amount. BTW, eliminating the medical deduction (for expenses in excess of 10% of income) is cruel.

ai2html-graphic-special3. Geographic fairness—Key elements of this proposal–no deduction for state/local taxes, and minimization of real estate deduction and a $500k cap on mortgage interest on homes– crushes those in high tax states with high home values (see NY, NJ, CT, MA, CA and others). The dark blue areas in the map highlight the areas of the country hurt the most by the elimination of the deductability of state and local taxes. Smells like payback to blue states to me.

4. Corporate tax reduction—Do we REALLY believe that when companies make more dollars that the wages of their employees will go up and they will hire a vast number of new employees? Yes, they will be more profitable—plain and simple. “Trickle down” is not realistic to anyone other than shareholders and executives. With full transparency, my own portfolio is laden with stocks from blue chip companies, and as a result I suspect I will likely benefit from lower corporate rates. But is this really necessary at the level being proposed?

In the end my fear is a tax cut largely focused on business and the wealthy, with some marginal goodies for some in the middle and lower class, is merely a ploy to supposedly help the little guy but in reality, does far less than it claims and sets the public up for a sucker punch that surely is coming.  If implemented, within months Congress will be clamoring for major reductions of “entitlements”—Medicare, Social Security, Medicaid—to close the growing deficit, exacerbated by tax reform. And healthcare “reform” will come around again as a veiled means to chop spending by throwing millions off of the ACA.

So, Strum if you are so smart (hardly), what are your brainy ideas, you may ask? Here’s what I would do:

1. Simplify the tax code—who doesn’t want that? That’s the best part of this idea.

2. Eliminate deductions and raise the standard deduction, but make it fairer across the board, geographically and tilt the savings to lower/average income taxpayers.

3. Reduce the corporate tax rate from 35% to 25-30%, better but not as costly

4. Raise the estate amount floor as proposed, but don’t eliminate it altogether after six years

5. Raise the minimum wage to $12 now, (but not $15). Want to help the little guy, then do it every paycheck?

6. Create a program that provides reduced tuition at state universities for lower/middle class.

7. Provide student loans at the low rate (2-3%).

8. Stop the “repeal/replace” b.s. chant and fix the ACA by driving down the cost of drugs through a federal marketplace.

I realize #s 5-8 have no specific relevance to the tax proposal, but if the idea behind the program is relief for the middle class then do things that will make a difference. Deal with the totality of the financial issues rather than “cuts, cuts, cuts” because dollars to donuts (BTW, where did that expression come from?) major “cuts, cuts, cuts” of programs will follow closely behind.

Whatcha think?




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