In a few days we will see the first draft of Republican tax reform legislation. Because of so much in-fighting, shifting strategies and secrecy within Republican party leadership we really do not know what is included in the bill. Below are compiled comments I’ve heard, mostly in online discussion with other accountants and a few small business clients.
The big deficit question – Does it make sense to pass a tax bill expected to expand our huge national deficit even further. We can barely pay the $500 Billion interest expense on our current national debt and the situation is only getting worse.
Corporate taxes – The portion of the nation’s taxes paid by corporations has decreased significantly over our lifetime. Yet the accepted belief is that we need lower business tax rates to compete for international business. Few oppose the idea of lower corporate taxes but if we want more international business then perhaps we should reconsider this current “America first” policy as a greater obstacle than the tax rate. But reducing the corporate tax rate makes most sense if we are offsetting the tax revenue loss with an increase in personal taxes. That isn’t likely to happen.
Individual taxes – There is debate on the top tax rate. It was 70% back when I first entered the work force. Now it is about 42% after counting the Medicare surcharge. Do we want it any lower? Public opinion polls say no.
Tax simplification – GOP leadership wants us to believe that simple is better. This is a point that is easy to sell to those without in-depth experience in public tax policy and therefore aids with the ‘sale’ of the tax reform agenda. Yet there isn’t any logic or evidence to support this belief that simple is better. Taxes are complicated because the financial world is complicated. Computer modeling make tax analysis and calculation easy even if human brains can’t grasp the entire calculations.
Itemized deductions – Does it make sense to replace mortgage interest and property tax deductions with a larger standard deduction? It depends on where you live and the status of your home. The real estate and home building industry knows this tax bill is bad for homeownership.
Health insurance – It is widely accepted that employers will eventually lose the ability to deduct health insurance expense for employees. There is no indication the change will happen in this current tax reform bill,
401(k) – Americans love to defer tax through their 401(k)s. Advancing the payment of taxes would be unpopular but does not have much significant effect. If it happens, there are options.
When the tax reform bill is actually published next week we will be able to calculate it’s effect on specific individual and business clients through pro forma tax modeling. I think that we will see that the benefits of the bill are generous for those above $500,000 income and estates above $5 million. But for the rest of us, the news will not be as good.