Tax Reform and President Trump

The Republicans in Congress are once again making an attempt to gain a major win during this legislative year by passing a tax reform bill.  The passage of a budget agreement in the Senate makes it possible to do under reconciliation.  This is key since they would only need a simple majority to pass the bill instead of 60 votes.  Nothing is considered a slam dunk since they have failed repeatedly to pass legislation to repeal ObamaCare under the same rules.  There remain 4-5 Republican Senators that create major problems for Majority Leader Mitch McConnell.  Those Republicans are John McCain (R-AZ), Lisa Murkowski (R-AK), Susan Collins (R-ME), Bob Corker (R-TN) and Rand Paul (R-KY).  Whatever bill the leadership and the administration come up with will have to garner at least three of those mavericks or it will be doomed.

The President campaigned on tax reform and has promised to reduce taxes on the middle class and stimulate the economy.  A lot of proposals have been flying around but no details have yet emerged on what a final bill will look like.  Speculation says that the corporate rate will end up at 20% which is higher than the 15% the President wanted.  One of the repeated promises is that it will be a simpler tax code that will allow people to file their own return with ease and that the middle class will see a significant tax cut.

There have been other rumors going around about how to pay for the tax cut.  Over and over the administration has said that the wealthy will still be paying the bulk of the taxes and they would like to make the bill revenue neutral.  To do that something will have to give.  One idea that has been floated is to reduce the amount people can put into a 401(k) plan and defer the taxes.  Right now you can put in $18,000 and if you are over age 50 you can put in $23,000.  These qualified dollars have been flowing into retirement plans and those dollars have been invested in the market.  To suddenly pull the plug on this flow of retirement funds would have a negative effect on the market and this would impact the middle class more than anyone else.  They are the ones that are fueling the 401(k) deferments.  The poor don’t make enough to put much away and the wealthy have already taken care of themselves in retirement.  In reality, all this would be doing is removing the tax break today and easing the tax burden in retirement.  Sort of like a Roth IRA or Roth 401(k) where there are not taxes due on the gain.  If the tax plan would allow that to occur then it might actually be a good thing but if you have to pay the taxes on the monies in this tax year and then pay on the gain it would be undoing a very popular program.

There has also been continued discussion on how to treat investment income.  Currently dividends and capital gains are taxed at different levels than ordinary income.  Democrats like Bernie Sanders have played a populist card in calling for these gains to be taxed the same as any other income.  He ignores the massive impact that would have on the market and once again it would impact the middle-class the hardest.  The wealthy could simply pull their money out of the market if the tax bill was no longer the risk but others have the bulk of their retirement money in the market in the form of a 401(k).  Should the market take a sharp downturn due the wealthy pulling their dollars out it would be their retirement funds that would take the sharpest hit.

Another big change that would help pay for any tax cuts would be eliminating the deduction for state and local taxes.  I have written previously that most Republicans could probably support this idea since the highest taxes in that category are paid by people living in high tax states like California and New York.  The commonality of these states are they vote heavily Democrat.  But any Republican from New York or California would vote for this proposals at their own peril.  To the rest of middle-America it would not be felt very much.  Only about 30% of the tax filers itemize which is where this deduction would fall and if you double the standard deduction, another proposal in the tax discussion, then that number would fall as well.

The Chairman of the Senate Finance Committee, Sen. Orrin G. Hatch (R-UT) is in a difficult position on this issue since Utah has a higher percentage of people that itemize, particularly in the middle-class brackets.  This is in large part due to the concentration of Mormons that pay tithes to the Church.  When you add that on top of the mortgage interest deduction and the state and local tax deduction it brings more payers into the itemization category.  I am not sure how expanding the standard deduction would alter those numbers.

What you can be assured of is the Democrats in the Congress will demonize any effort by Republicans to pass a tax reform bill.  They and their liberal media friends will denounce the bill as a give away to the wealthy.  They will, of course, ignore that the top 10% of taxpayers in this country currently pay 90% of the taxes.  It stands to reason that any tax cut would mean that they would get a tax cut as well and the Democrats will focus on the dollar amounts of the cuts to the wealthy and ignore the dollars amounts they are paying.   This is good media for them and they have willing allies in the media to spew out this nonsense.  It reminds me of a tax story that went around several years ago.  It has been attributed to many but the story is always the same.  You can read it below and judge for yourself.

Suppose that every day, ten men go out for dinner and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:



The first four men (the poorest) would pay nothing.

The fifth would pay $1.

The sixth would pay $3.

The seventh would pay $7.

The eighth would pay $12.

The ninth would pay $18.

The tenth man (the richest) would pay $59.

So, that’s what they decided to do.



The ten men ate dinner in the restaurant every day and seemed quite happy with the arrangement, until one day the owner threw them a curve.



“Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily meal by $20.” Dinner for the ten now cost just $80.



The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still eat for free.



But what about the other six men – the paying customers? How could they divide the $20 windfall so that everyone would get his fair share?



They realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to eat their meal. So, the restaurant owner suggested that it would be fair to reduce each man’s bill by roughly the same amount, and he proceeded to work out the amounts each should pay.



And so:



The fifth man, like the first four, now paid nothing (100% savings).

The sixth now paid $2 instead of $3 (33% savings).

The seventh now pay $5 instead of $7 (28% savings).

The eighth now paid $9 instead of $12 (25% savings).

The ninth now paid $14 instead of $18 (22% savings).

The tenth now paid $49 instead of $59 (16% savings).



Each of the six was better off than before. And the first four continued to eat for free. But once outside the restaurant, the men began to compare their savings. 

 

“I only got a dollar out of the $20,” declared the sixth man. He pointed to the tenth man,” but he got $10!”

“Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar too.

It’s unfair that he got ten times more than me!”

“That’s true!!” shouted the seventh man.

“Why should he get $10 back when I got only two? The wealthy get all the breaks!”

“Wait a minute,” yelled the first four men in unison. “We didn’t get anything at all. The system exploits the poor!”




The nine men surrounded the tenth and beat him up. The next night the tenth man didn’t show up for dinner, so the nine sat down and ate without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill!



And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction.

I have read this story over and over during the ensuing years and it still rings true to me.  The liberals and their friends in the media always ignore talking about how actually pays taxes and instead focuses solely on any break they may get.  But in the end they still end up paying the bulk of the taxes.

The final problem for Republicans in passing a tax reform bill is the President himself.  I was glad that Trump won last November if for no other reason than the Supreme Court.  But in the passing months it has become abundantly clear to me that he does not know how to be the President.  He has good ideas on policy but his personality overshadows them.  His constant attacking of everyone that dares to either criticize or disagree with him begins to erode the support he builds on policy.  The national anthem issue is a classic example.  The general public agree with him on the issue but also by a wide margin believe he should stay out of it.  He should have more important issue to be bothered with at this time.

His latest scuffle with a non-descript Congresswoman from Florida over a phone call to a bereaved widow of a fallen soldier is an example of what not to do as a President.  Get above the noise and be a leader.  I fear, as a moderate conservative, that he may be splitting the party in a way that would take years to rebuild.  In the last election the media portrayed the Republican party as one that was in disarray only to find out that the divisions in the Democrat party were greater and the Republicans coalesced around Trump to defeat Hillary Clinton.  Now he threatens to take that unity and split us apart.  Please Mr. President, put down the phone and start being the President.  One that all of us can look to for leadership.

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