We Need Tax Reform

While the Senate wrestles with the dilemma they have put themselves in with healthcare some people are looking to the next big battle that needs to be addressed.  I am talking about tax reform.  I have written on this before and it now seems that Congress will make an attempt to try and simply the code and pass some meaningful reforms.  There are several items that I believe can get bipartisan support and this may actually increase the chances of actually passing a bill this year.

First is reducing the corporate rate.  We are higher than most western nations and at 34% it needs to be pared back.  President Trump has offered a number around 15% but I doubt that could get enough Democrats on board to go that low.  President Obama had floated a number of 24% and I think that something between those two is very doable.  Perhaps a 20% figure.  This would go a long way to addressing the issue of companies moving off shore.  They don’t do this because they don’t like the United States despite what some on the left might suggest.  They do this because money always goes where it is treated the best.  As an example.  You want to buy a pair of shoes and in the shop they have a price tag of $70.  But then you see and ad that says if you would just drive 10 miles to the next town you could get them for $40.  How many of you would immediately be in your car to the next town?

When these companies move off shore (they are called inversions) they don’t move much in the way of manufacturing, just the corporate headquarters to obtain the lower tax rate.  I think there is strong bipartisan support for a lower number.

This reduction in the corporate tax rate would have a secondary effect of allowing companies to bring money parked overseas back to the United States.  It is estimated that as much as between $3-4 Trillion dollars would come home.  There have been efforts in the past to give some sort of holiday with a reduced rate and something like this should be included in a tax bill.  Even if you taxed this money at say 12% it would be a boon to the treasury.  You could earmark this money for infrastructure spending.

The next thing I would include in any tax bill would be some language that would encourage retirement savings.  With pensions disappearing in almost all private sector jobs it becomes important to find ways to allow people to save more.  The limits in 401(k) plans should be looked at.  When these were first written into law it was viewed as a way to supplement your company pension and it has worked very well.  But now the limits need to be raised.

In a 401(k) plan you can defer $18,000 and if you are over age 50 you can defer an additional $6,000 as a catch up plan.  There is a limit placed on how much you can get in a employer matched contributions but evidence now shows that employer matches are becoming less and less.

In a SEP or Keogh those limits are increased to $54,000 and so self-employed people can defer more towards retirement.  Those limits were made higher because there would be no employer match.  There would also be no company pension.

I would suggest that the limits in 401(k) plans be raised to match what a SEP or Keogh plan can get and if the employer is not making the match then the employee could defer more if possible.  Democrats have claimed this would only benefit the wealthy.  But they are wrong.  The people that would benefit from the is the most are the middle class.  In most cases they are getting close to 50, the children are finally grown, and they are way behind in retirement savings.  Now they have more disposable income and while you cannot spell Retirement at age 25 when you hit 50 it begins to scare you to death.  Allow them to contribute as much as possible in these plans.  It will pay off in the long run.

With their inability to repeal and replace ObamaCare the Republicans have lost a lot of money in the baseline for tax reform.  Some say it is as much as a Trillion dollars.  So now you have to come up with some revenue in order to simplify the code and reduce the brackets.  I would eliminate the mortgage interest deduction.  In the last available data from 2013 on 30% of taxpayers itemize so we know that almost 70% take the standard deduction.  If you increase the deduction you will reduce the number itemizing.  So who would oppose this change?  First the realtors and builders would start screaming from the rooftops.  They would immediately show some study that it will reduce home ownership.  But if less than 30% are itemizing it should not have a big impact.  As a Republican I would realize that most of the itemizers live in urban areas with high costs of housing.  These are Blue states and Democrat voters using this deduction.  It will not affect the average suburban and small town American.  The savings could be about $75 billion.

Now lets look at another one that could bring about some savings.  I would eliminate the state and local tax deduction.  Again, only people that itemize claim this and it goes disproportionately to wealthy people.  According to the Tax Foundation 88% of the benefit goes to people making in excess of $100,000.  In fact, over half of that deduction come from six states:  New York, California, Pennsylvania, New Jersey, Illinois and Texas.  Four of those states are decidedly Blue states, Pennsylvania is Purple and Texas is Red.  Looks like a politically winning strategy for Republicans.  Democrats are always wanting to raise taxes so lets raise them on their voters.  See how that plays.  One thing you can count on is Chuck Schumer having a coronary over seeing something like this passed.  The savings have been estimated at close to $100 Billion.

The one sacred cow in tax reform is charitable giving.  It is a pretty hefty score in savings but I feel confident that between the Churches on the right and the Universities on the left nobody is going to be cutting that deduction.  But again, it only benefits those that itemize so I am willing to look at cutting it and I will be up front about saying I benefit from this.  I pay 10% of my income to the Church but with the ability of take the deduction it is really like 6%.  I would pay more taxes if this were eliminated but I never like to suggest raising someone else’s taxes if I am not willing to raise mine.

Before I leave this topic for the day I should also point out that we lose billions of dollars every year in revenue because of unreported income.  Years ago I was the Board Secretary for a large high school basketball officials association.  We actually issued 1099s to our officials if their income exceeded $600 but I was always amazed at new officials who had moved in from other states and how irate they were when they got their 1099.  I would get a phone call asking if this meant they had to pay taxes on the money.  I said no, it just meant the government was aware that they had this source of income.  Every year we would hold a class on how to fill out a Schedule C.

In today’s world you have a lot of income sliding under the table.  We have always known that people in the service industry underreport tips and that is hard to catch.  But with ride programs like Uber it is now approaching some real dollars.  People renting out their homes over the Internet is another big source of tax avoidance.  Before you start asking if I am a real conservative by suggesting these people pay taxes on their money I would respond by saying if they don’t pay then someone else has to pay and just because you earn money in a manner that lets you hide it does not make it fair for you to not pay while others have to pay.

These are just a few suggestions.  I have some others and will write about them in the future as we see a bill take shape.  If you have any comments about these blog posts I encourage you to write them in the comments section at the end of each blog.

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