Clearly, the United States needs, no, demands, real, meaningful and lasting tax reform. Repeal and Replace, long a political motto, was wasted on Obamacare. This political animus, this failed effort, should have been directed at U.S. Code: Title 26 - INTERNAL REVENUE CODE. Now that is a law that truly needs to be “repealed and replaced”.
Why “repeal”, you might ask. One cannot fix what is not broken. Our tax code is not “broken”, at least not in the ordinary sense of the word. The Spruce Goose wasn’t broken, it was just a flawed idea. So is it true with our tax code. It ain’t broke. It’s just wrong. Tax on income may or may not be the right idea, but I’ll leave that debate for another time. Regardless, treating different kinds of income differently, taxing one source one way and another source…well…another way; taxing one recipient one way and another…well…another, simply makes no sense.
Why then “replace”? The answer is simple. For good or ill, societies need governments. Moreover, in order to function, governments need money. Thus, taxes are, as has often been said, a necessary evil. Regardless, as Adam Smith opined in his four maxims, taxes should be relatively fair, predictable, conveniently and efficiently administered and collected. Can anyone argue that our tax code comes close to any of these objectives?
Based on rhetoric during and subsequent to the last election, perhaps the time for real tax reform has arrived. Yet, given Donald Trump’s non-existent ideology, his failed leadership and his self-serving manner, I remain skeptical.
Nonetheless, the White House has submitted an outline for tax reform. It is difficult, if not impossible, to offer a meaningful evaluation because it is so short on details. But, let’s examine some of the highlights, focusing only on those that apply to individuals. The full text of the plan can be found here.
The White House trumpets (pun intended) this plan as tax relief and simplification for middle class families. The proof, as they say, will be in the particular pudding.
In no specific order, the plan increases the standard deduction, eliminates personal and dependent exemptions, eliminates the AMT and eliminates the estate tax. It eliminates most itemized deductions with the exception of charitable contributions and mortgage interest. The plan increases the child tax credit, though how much is unknown. Apparently, the plan eliminates most other tax credits, except those for earned income, retirement savings and education. Again, specifics are unclear. Finally, the plan caps the tax rate on income from “pass through” entities at 25%.
Increase the standard deduction — The plan promotes the idea that it provides relief by “roughly doubling the standard deduction”. If one limits oneself to just standard deduction amounts, this is a reasonably accurate assertion. Currently, this amount is $12,700 for MFJ. Trump proposes $24,000, roughly doubled…right? But, given that the personal exemption, currently $4,050, is rolled into the standard deduction, the comparison must be made between $20,800 ($12,700 + $4,050 + $4,050) and $24,000. Not nearly double. This hyperbole applies to the standard deduction for single filers as well.
Eliminate the AMT — Can we just shout, Yea!!!, Hurray!!!, Hubba, hubba, hubba!!!, Hip, hip hurrah!!!, and leave it at that. The FY2003 report submitted by the National Taxpayer Advocate stated:
"The problem that I believe requires the most immediate and thorough response is the growing reach of the individual Alternative Minimum Tax. This problem is looming over all of us—taxpayers, Congress, the IRS. In the years to come…increasing numbers of taxpayers will discover they, too, “won” the AMT lottery. For that is how the AMT appears to function—randomly, no longer with any logical basis in sound tax administration or any connection with its original purpose."
Eliminating the Alternative Minimum Tax will reduce the tax burden on many high income taxpayers much more than on the middle class, but, it should be eliminated.
Increase the child tax credit — While the amount of the increase is unknown—the plan uses the word “substantial”—this change will likely help families with children. Other families, not so much. However, some assumptions must be made in order to affect a true comparison. Assuming a family of four that does not itemize, with total income of $60,000, under existing rules, taxable income approximates $31,200. Under existing tax tables, income tax would approximate $3,740. The existing child tax credit would reduce that amount by $2,000, leaving a tax bill of $1,540. Under proposed rules (with some assumptions made), this same family would report taxable income of $36,000 (assume $24,000 standard deduction, no exemptions) and tax approximating $4,320 (assume a 12% tax rate on the entire amount). If one assumes the child tax credit increases by 50% (substantial), then the resulting $3,000 credit would produce a tax bill of $1,320. Now that is what I call real, meaningful “tax relief for middle class families”. This middle class family will end up with $18 more each month.
Eliminate the estate tax — This recommendation, despite whether one believes it is a good or bad idea, has little to nothing to do with “middle class families.” At present, the estate tax is limited to estates with a value exceeding $5,500,000. According to the Joint Committee on Taxation, only estates of the wealthiest 0.2 of one percent of Americans—roughly 2 out of every 1,000 people who die—owe any estate tax. I’d hardly call that “tax relief for middle class families”.
Limit the maximum tax rate for small businesses — Although the plan lacks sufficient detail to assess the impact of this suggestion, it is this author’s opinion that it is an excellent idea. While I do not know specifics, the idea that a small business can cause a taxpayer to incur a tax bill in the 10’s of thousands, rather than limiting the tax rate, perhaps the suggestion might be that, if the owner does not take the income out of the business, there is no income to report, hence no tax bill.
Further, there is insufficient detail to express any thought on the impact of proposed changes related to tax benefits that “encourage work, higher education and retirement savings. Nor is there sufficient detail to assess the impact of changes to various credits.
Finally, there is not room in this post to discuss the impact of proposed changes to business taxes. That remains for another time. And, it is time for this author to enjoy an adult beverage.