Who Really Pays Taxes

Now that we have had some time to digest the tax reform bill passed last year we can start to look at the numbers and try to figure out who is making political comments and who is actually telling the truth.

First we have to look at the corporate tax rate.  The bill reduced this top rate from 35% to 21%.  Immediately the Democrats started calling it a corporate give away.  They developed a form of amnesia because only a year before President Obama was recommending a cut to 22%.  I guess that extra 1% was an enormous boondoggle to corporate America.

The results of that cut have already started to manifest itself.  Corporations are repatriating money that has been kept overseas due to the high tax rate.  Financial experts estimate that U.S. corporations have in excess of $3.5 Trillion dollars on accumulated profits stored abroad and that will start to come home. Under the tax legislation ,multinationals have to make a one-off payment on profits socked away overseas — 15.5% on cash holdings and 8% on illiquid investments. And after that, they can bring foreign profits home tax-free.  As the tax law goes into effect you can expect the majority of those funds to come back to the United States and be reinvested in the economy.

Next we move to the individual rates.  Once again Democrats started a campaign against the tax bill on a two pronged attack. First the said it was only temporary for individuals while the corporate was permanent.  This was part of their corporate give away claim.  They point out in the law that individual cuts will expire in 2025.  What they do not say is the reason for this expiration date.  The tax bill was done under what is called budget reconciliation. This was the only way the Republicans in the Senate could pass the bill without it being subjected to a Democrat filibuster, something the Democrats promised they would do.  There was no way they were going to sit back and allow the Republicans and President Trump pass something as important as Tax Reform on a bipartisan vote.  That would mean they agreed with what they were doing and politically that would not sit well with their far left base.  They have to oppose everything.  Under the reconciliation process they could not make the individual cuts permanent but nobody in Washington expects them to be repealed.

The one move the Republicans did that I probably would not have done was dropped the top rate from 39% to 37%.  It was largely symbolic but it gave the Democrats a talking point.  Those using that talking point do not mention that the high earners subject to that tax also lost some key deductions so their taxes will probably remain about the same.  If you look at the chart below you will get some understanding of the impact of the bill.

Slide1

If you look at the chart you should be able to see that the top taxpayers are going to actually see their share of the tax burden go up.  The top .01% paid 18.9% of the taxes in 2017 and that amount will increase to 22% in 2018.  These are people with income in excess of $3.2 million.  The second group, the top 1% with incomes over $730K will see their share of the taxes increase from 38% to 43.4%.

I pointed out last week that the Joint Tax Committee Staff predicted that 85% of taxpayers will claim the standard deduction, which was doubled, and so the only people impacted by changed in deductions will be those filing long forms and those tend to be people with high incomes. That is why I find it ironic that Democrats are screaming about the cap on State and Local Taxes (SALT) because it will only be high earners that are affected.  I guess they want them to pay more in taxes but not when they are their constituents. (campaign donors)

The tax bill that Congress passed was a middle class tax cut.  Workers are now seeing an increase in their take home pay.  Companies are paying bonuses (I would prefer pay increases that last beyond a bonus) and expanding hiring.  Unemployment was at 4.2% last month and more importantly people that had left the workforce (no longer counted in the unemployment rate) are coming back in with optimism that they can find a job.  The most important numbers are in the area of manufacturing.  This is where the United States has been sliding for years.  The new numbers show both and increase in manufacturing jobs and manufacturing wages.  That is good news for middle America.

The bill also provided a pass through on income for small businesses (S Corps, LLCs, etc…) that will allow the entrepreneurs who started these businesses to become more profitable and expand.  Congress strategically banned certain type of businesses from this benefit.  Consultants, doctors and other professional people do not qualify.  This provision was directed  towards those small businesses that employ people and either manufacture a product or work in other areas where a product is either made or finished.

What I would say to anyone that reads what I write (not sure it is that many since nobody ever leaves comments) is to look at the facts and decide for yourself.  Is it a corporate give away when basically the same rate was recommended by the previous Democrat President?  If is a giveaway to the high earners when they will actually be paying a higher percentage of the taxes?  You decide!

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