Last month’s column discussed understanding your investments, which I said I’d continue this month. However, with President Trump signing the tax bill into law, I feel it’s important — at least to me, as a CPA — to give my view regarding what just happened. Note, what’s written in this column is my personal view and it’s not meant to express the view of my firm or any other business or personal associations I have.
I don’t usually discuss politics, but I feel it’s important here for readers to understand that I don’t favor one party over another. I’m an independent! To be fair, I’m registered with a political party simply because I want to vote in primaries. That said, I vote for whom I feel is more in line with my personal views, regardless of what party they may be affiliated with.
The new tax law
My goal here isn’t to write about the business or individual tax changes; the individual and business provisions are discussed everywhere you look in the media today, and I’m not interested in using this column to do the same. How these tax changes will impact individuals depends on each person’s situation. No blanket statement can be made insofar as how the tax law will impact us as a whole.
A recent column written by Steve Forbes, entitled “The GOP Forgot Tax Cutting 101,” is an interesting take on the new tax law. I’m taking the liberty of injecting his view of what just happened in this column.
First, let’s talk baseball. Did the GOP hit a home run with this new tax law? I believe they did. They desperately needed a home run to stay completive in the game of politics, and they managed to do this in my opinion. However, will they win the World Series? Before you get to the World Series you have to make it through the playoffs. Democrats are a formidable team that also want to win. Did that team hit a home run in the last inning? I believe they did with Obamacare. The mistake the GOP made was to try and repeal it rather than fix it. Remember, Republicans didn’t support the ACA, similar to Democrats not supporting this tax bill. The GOP just couldn’t win in the Democrats’ ball park. Will the Democrats win the World Series? They too have to win in the playoffs first, which we call the midterm elections. We’ll just have to wait and see.
The issues that stand out
According to Forbes, two things stand out here. One is somewhat arcane but absolutely critical to effective tax policy. The other is astonishing given all the GOP verbiage on the importance of investing and the alleged need for “revenue offsets” for most of their cuts. These two factors are marginal rates and capital gains.
Marginal tax rates
The marginal tax rate is the tax rate that applies to the next increment of a taxpayer’s taxable income. It’s calculated by dividing the change in tax by the change in taxable income. In a graduated tax system — we have a graduated tax system — additional income or deductions can push a taxpayer into a higher or lower tax bracket thus changing the marginal rate. Most taxpayers incorrectly believe that all their income is taxed at the marginal rate. This mistake leads people to say “I do not want to earn additional money because it will put me in a higher tax bracket.”
Truth be told, if a taxpayer receives a large increase in income (or deduction) such that it would change tax brackets, the taxpayer could not identify his or her marginal tax rate by simply looking at the table. A taxpayer with taxable income of $315,000 is in the new 24 percent tax bracket. Earning $1 dollar more pushes the taxpayer into the 32 percent bracket. The marginal tax rate therefore has to be calculated based on the above formula.
According to Forbes, tax rebates have little impact on expanding the economy because they don’t change the marginal rate. “They are one-shot deals. Nice to have, but they won’t really affect what financial decisions are made, the way lower marginal rates would.” The same result is true for child care credits.
So, where do we go? History tells us that John Kennedy and Ronald Reagan slashed personal income tax rates from top to bottom. Ronald Regan did away with many tax shelters but also reduced personal tax rates. The current GOP eliminated or reduced many tax deductions but did not “slash” the tax rates. In fact, for some upper income taxpayers the marginal rate will go up! What’s the problem with this? It’s these taxpayers who supply a good portion of the savings necessary for investments that improve the standard of living. What will they do with higher marginal rates? Your guess is as good as mine.
According to Forbes, the current tax law will do nothing to boost the economy. The GOP would have been better off enacting a 10 percent reduction in rates for everyone. To make sure workers got higher paychecks, they could have cut off the first two points of the federal payroll tax.
Throughout the negotiations, Congress never put forward a proposal to lower the capital gains rate. Not smart, in my view. Lowering capital rates increase revenue and investment is boosted. So, why was this not considered in the new tax law? The GOP feared that by lowering capital gain rates, the change would be perceived as favoring the rich. Well, they’re lucky, which means we’re lucky. The economy is gaining. But for how long?
So, where do we stand now? It remains to be seen. Nevertheless, according to Forbes, President Trump’s deregulation push is bearing fruit. Washington is no longer dreaming up new ways to hobble business every day. Reducing the corporate tax rate and meaningful cutting the tax on partnerships, limited liability companies, and S corporations, will overcome the other shortcomings of the GOP. Would the Democrats have done better? I doubt it, but I’m eagerly awaiting the November 2018 midterm elections to find out.
Richard Goldstein is a partner at Buchbinder Tunick & Company LLP, New York, Certified Public Accountants.