The Tax Bill Passed Last Night

This is the summary from Thomas.gov of the tax bill that passed the Senate last night.

H.R.1 — 115th Congress (2017-2018)

Introduced in House (11/02/2017)

Tax Cuts and Jobs Act

This bill amends the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses.

With respect to individuals, the bill:

  • replaces the seven existing tax brackets (10%, 15%, 25%, 28%, 33%, 35%, and 39.6%) with four brackets (12%, 25%, 35%, and 39.6%),
  • increases the standard deduction,
  • repeals the deduction for personal exemptions,
  • establishes a 25% maximum rate on the business income of individuals,
  • increases the child tax credit and establishes a new family tax credit,
  • repeals the overall limitation on certain itemized deductions,
  • limits the mortgage interest deduction for debt incurred after November 2, 2017, to mortgages of up to $500,000 (currently $1 million),
  • repeals the deduction for state and local income or sales taxes not paid or accrued in a trade or business,
  • repeals the deduction for medical expenses,
  • consolidates and repeals several education-related deductions and credits,
  • repeals the alternative minimum tax, and
  • repeals the estate and generation-skipping transfer taxes in six years.

For businesses, the bill:

  • reduces the corporate tax rate from a maximum of 35% to a flat 20% rate (25% for personal services corporations),
  • allows increased expensing of the costs of certain property,
  • limits the deductibility of net interest expenses to 30% of the business’s adjusted taxable income,
  • repeals the work opportunity tax credit,
  • terminates the exclusion for interest on private activity bonds,
  • modifies or repeals various energy-related deductions and credits,
  • modifies the taxation of foreign income, and
  • imposes an excise tax on certain payments from domestic corporations to related foreign corporations.

The bill also repeals or modifies several additional credits and deductions for individuals and businesses.

Some Facts About The Republican Tax Plan

The first fact to remember about the Republican tax plan is that what is eventually passed by Congress will be different than what was introduced today. How different we don’t know, but it will be different.

The Daily Signal posted an article today highlighting some of the proposed plan. The plan would simplify taxes, lower income tax rates, and positively impact business taxes.

The article reports:

The tax reform package would simplify and lower the current tax rate structure, from seven different rates ranging from 10 percent to 39.6 percent, to four rates: 12 percent, 25 percent, 35 percent, and 39.6 percent.

Most low- to middle-income earners would face lower marginal tax rates, which would help encourage more work and also put more money back into taxpayers’ pockets to spend more productively than the federal government.

Unfortunately, the plan maintains the top marginal rate of 39.6 percent (which reaches 43.4 percent when factoring in the Obamacare surtax).

While only 1 of every 150 taxpayers actually pays the top rate, more than 1 of every $5 of taxable income is subject to that tax rate. That means a lot of economic activity is affected by the top rate, and lowering it would have a significant and positive impact on investment, productivity, incomes, and job growth in the U.S.

Maintaining a high top rate for wealthy Americans may make the plan more politically palatable, more appealing to average Americans, and help reduce the alleged “costs” of the tax reform plan. In reality, though, it would not result in nearly as much revenue as static estimates project, and it would limit the plan’s ability to maximize job growth and boost incomes for everyday Americans.

One aspect of the tax plan that is going to meet with a lot of resistance is the change to state and local tax deductions.

The article explains:

The proposed tax plan would partially eliminate state and local tax deductions by getting rid of the deduction for income or sales taxes, and by capping the deduction for property taxes at $10,000.

State and local tax deductions provide no economic benefit. In fact, they are outright detrimental to the economy.

By allowing those who itemize their taxes to deduct property taxes as well as income or sales taxes they pay to state and local governments, these deductions shift the burden of high-tax states onto low-tax states, and spread a portion of high-income earners’ taxes onto lower- and middle-earners’ tax bills.

For example, just seven states (California, New York, New Jersey, Illinois, Massachusetts, Maryland, and Connecticut) receive more than 50 percent of the value of the state and local tax deductions.

And on net, the average millionaire receives 102 times as much benefit from the state and local tax deductions as a typical household that makes between $75,000 and $100,000.

Eliminating the sales and income tax deductions would be a huge benefit to at least 85 percent of Americans.

Please follow the link above to read the entire article. It explains how each part of the tax plan would impact families in all income brackets. What we are hearing in the mainstream media is not necessarily accurate.

 

 

Preventing The Fleecing Of The Middle Class

The American tax code is a tribute to the effectiveness of lobbyists and big campaign donors. The loopholes in the code for people who make a lot of money are numerous. Even with loopholes in place, the rich pay a lot of taxes. As I have previously reported, The top 10 percent of income earners, those having an adjusted gross income over $138,031, pay about 70.6 percent of federal income taxes. About 1.7 million Americans, less than 1 percent of our population, pay 70.6 percent of federal income taxes. These numbers come from actual IRS data.

However, it seems that when it comes to eliminating loopholes, it’s always the middle class loopholes that go away.

Breitbart posted an article today about Congress‘ latest effort to take away a middle-class tax break. Because of a certain lack of faith in the future solvency of Social Security, many employers offer employees 401k retirement plans. Aside from allowing middle-class families to save for the future, these programs provide a place to put money so that it will not be taxed during the highest earning period of the employee. It will be taxed later at retirement when traditionally a person’s earnings are lower and generally taxed at a lower rate. Congress was evidently planning to alter the current system.

Breitbart reports:

“There will be NO change to your 401(k),” Trump tweeted. “This has always been a great and popular middle class tax break that works, and it stays!”

House Republicans were considering a plan to slash the amount of income American workers can save in tax-deferred retirement accounts. Currently, workers can put up to $18,000 a year into 401(k) accounts without paying taxes on that money until they retire and withdraw money from their savings. Proposals under discussion on Capitol Hill would set the cap lower, perhaps as low as $2,400. The effect would be a huge tax hike on middle class workers.

The plan to lower the cap on 401(k)’s would not have had an effect on long-term government deficits. Instead, it would have raised tax revenue now but lowered it in the future, since the retirement savings would already have been taxed. But taxing the savings would have had an impact on household budgets and may have discouraged workers from saving, increasing their future dependence on government benefits.

Let’s cut spending to ‘pay for’ tax cuts. Actually, if taxes are cut, economic growth should increase to a point where there is no loss of revenue. During the 1980’s, after President Reagan cut taxes, government revenue soared. Unfortunately, the Democrats who controlled Congress at the time greatly increased spending, so the government debt increased rather than decreased. Generally speaking, lowering taxes increases revenue–people are less inclined to look for tax shelters.

The Laffer Curve works:

Congress needs to keep this in mind while revising the tax code.

 

The Government Doesn’t Need More Tax Revenue–It Needs To Cut Spending

CNS News reported the following today:

The federal government brought in a record of approximately $213,300,000,000 in individual income tax revenues through the first two months of fiscal 2017 (Oct. 1, 2016 through the end of November), according to the Monthly Treasury Statement released today.

That is approximately 36 times the $5,966,000,000 the federal government brought in from customs duties imposed on foreign imports over the same two-month span.

In constant 2016 dollars (adjusted using the BLS inflation calculator), the record $213,300,000,000 in individual income taxes the Treasury raked in during October-November of this year was up $6,432,550,000 from the $206,867,450,000 it brought in October-November of last year.

Meanwhile the website usgovernmentdebt.com posted the following:

The tax revenue is going through the roof and the deficit is rising. Would you run your household budget this way?

The Problem Is Not The Revenue–It’s The Spending

CNS News posted a story today stating that the federal government raked in a record of approximately $2,883,250,000,000 in tax revenues through the first eleven months of fiscal 2015 (Oct. 1, 2014 through the end of August), according to the Monthly Treasury Statement released Friday. This equals approximately $19,346 for every person who was working either full or part-time in August.

The article further reports:

Despite the record tax revenues of $2,883,250,000,000 in the first eleven months of this fiscal year, the government spent $3,413,210,000,000 in those eleven months, and, thus, ran up a deficit of $529,960,000,000 during the period.

…The largest share of this year’s record-setting October-through-August tax haul came from the individual income tax. That yielded the Treasury $1,379,255,000,000. Payroll taxes for “social insurance and retirement receipts” took in another $977,501,000,000. The corporate income tax brought in $268,387,000,000.

The chart below is an illustration of America‘s spending problem.

The article also noted that under ObamaCare new taxes took effect in 2013.

Excessive spending is a problem that Washington has no incentive to fix. It is up to the voters to give them an incentive–fix this or we vote you out of office!

 

Tax Policies Have Consequences

Today’s New York Post posted an article about the impact of Mayor de Blasio’s proposed tax policies.

The article reports:

Taking a page out of Barack Obama’s playbook, de Blasio casts his push for a tax hike on those earning over $500,000 as a moral imperative.

“I believe it’s time to ask the wealthy to do a little more,” he said last year. He paints taxes as a matter of giving back, as though the money was taken from others.

The article also reports New Yorkers’ response to this idea:

One friend says 10 wealthy people have told him they are leaving and another says disgusted New Yorkers bought $1 billion in residential property in Florida since the November election. The Sunshine State confers an automatic tax cut of about 12 percent because it has no city or state income tax, nor does it have an inheritance tax.

Below is the Laffer Curve. It represents the fact that there is a point where you raise taxes to the point that revenue decreases. There are many reasons for this–people find ways to shield their money from taxes, people relocate to places with lower taxes, and people make a decision to earn less so that they will be taxes less. At any rate, there is a tipping point. It remains to be seen if New York City has reached it.

English: The standard Laffer Curve

English: The standard Laffer Curve (Photo credit: Wikipedia)

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A Forgotten Promise

When he ran for office in 2008, President Obama promised not to raise taxes on any family that earned less than $250,000. Then candidate Obama stated, “I can make a firm pledge. Under my plan no family making less than $250,000 a year will see any form of tax increase. Not your income tax, not your payroll tax, not your capital gains taxes, not any of your taxes.” (from Townhall.com) Well, I guess that promise has been added to the list of broken promises.

Today, Heritage.org posted a story about tax increases that occurred in 2013 and tax increases planned for 2014.

The article reports two new taxes for 2014:

  • Obamacare’s individual mandate. Beginning in 2014, it’s mandatory to purchase health insurance. If you don’t, you’ll pay a penalty that dramatically increases over time. It starts at $95 or 1 percent of your income (whichever is greater). It rises to $325 or 2 percent of income in 2015, and $695 or 2.5 percent of income in 2016.
  • Obamacare tax on insurance companies. If you liked seeing your premiums go up, you’ll love this new tax on health insurers—which they are most likely to pass on to you.

The article also posted a list of the 2013 tax increases. The Social Security payroll tax for workers went from 4.2 percent to 6.2 percent for everyone–regardless of whether or not they earned $250,000.  Also increased were various taxes on high earners–marginal tax rates increased, deductions decreased, investment taxes increased, and inheritance taxes increased. Excuse me for being totally politically incorrect here, but keep in mind that taxes on people who do not work but collect welfare or other government handouts did not increase. Keep in mind that when you tax an activity it decreases, and when you don’t tax an activity it increases. These kinds of tax increases do not encourage economic growth–they stifle it.

The article reminds us:

President Obama promised the American people a “balanced approach” of tax increases and spending cuts to reduce deficits and debt. He achieved the tax increase portion of that approach. Now Congress needs to force him to follow through on the spending cuts.

Until we see spending cuts, the economy will continue to grow much more slowly than it is capable of growing. The combination of high taxes and over regulation by the government is the biggest obstacle to a much needed economic recovery.

 

 

 

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A Compromise Is Not Always A Compromise

This story is based on two articles–one posted in Investor’s Business Daily yesterday and one posted in the Wall Street Journal today. Both articles deal with President Obama’s proposed “grand bargain” on tax reform.

Yesterday in Chattanooga, Tennessee, President Obama offered to cut taxes for corporations in return for increasing government spending. (I believe he calls it “investment.”)

The Wall Street Journal reports:

Mr. Obama will agree to reform the corporate tax code—a GOP priority and one even the President claims to support—but only if the reform raises more revenue and only if he is allowed to spend that windfall on his priorities.

A White House press release clarified that the President would also like to raise taxes on individuals, not just businesses, while allowing federal spending to rise still higher. But showing they retain a sense of humor in the West Wing, the press release suggests that the President is willing to forgo this tax increase for now because he wants to “work with Republicans.”

Investor’s Business Daily reports:

Since Obama’s “stimulus” took effect, job growth has been subpar, GDP gains are at record lows, median incomes have shrunk and the number of Americans on welfare has surged.

So we know that won’t work. But what about corporate tax cuts?

The nonpartisan Tax Foundation reckons a simple cut in the corporate tax rate to 25% would boost GDP more than 2% and wages by nearly as much. And capital investment would jump more than 6%.

Moreover, a corporate cut would increase federal revenues and help lower our deficits — assuming, that is, Obama doesn’t spend the new money.

Unfortunately, part of Obama’s “bargain” is to increase taxes on U.S. companies that operate abroad and to reduce business writeoffs for investments — the seed corn of future economic growth.

Even at 28%, Obama’s new tax rate would be higher than the 25% average paid by our main competitors.

So with one hand the president giveth, and with the other he taketh away. Worse, he seems intent on rewarding big companies with tax cuts while punishing small companies that account for 85% of all new jobs.

So what is going on here? The President wants to continue the tax and spend policies the Democrat party is known for while claiming to support tax reform and lower tax rates for corporations. Those tax and spend policies are what is causing the slow growth of the economy and also what got us into the fiscal mess we find ourselves in. However, depending on how the mainstream media reports this, the low-information voters may wonder why the Republicans won’t compromise. There is no compromise being offered here, but the media will probably neglect to mention that fact.

This proposal will kill any economic growth we may have in the near future. Hopefully the Republicans will not be drawn into the trap.

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The Boston Globe Gets It Right

I live in Massachusetts. I don’t plan to live in Massachusetts too much longer as my husband will be retiring at the end of this year, and the Massachusetts tax structure does not make retirement here a reasonable option. Real estate taxes are high, the temporary increase in the rate of the state income tax has been with us for more than twenty years, and if the current governor has his way, things will only be getting worse.

Today’s Boston Globe posted an editorial by Barbara Anderson, executive director of Citizens for Limited Taxation. The article is entitled, “Manage money from previous tax hikes first.” That pretty much says it all, but she goes on to explain what she means.

The article reminds us of some of the history of tax increase in Massachusetts:

In 1989, Governor Michael Dukakis returned from the presidential campaign trail and demanded tax hikes to fund a billion-dollar budget increase; supporters rallied at the State House, some of them dressed as giant crayons, to protest potential cuts to the arts. The legislative leadership was able to get the votes for the tax package only after promising that the new income tax rate, increased from 5 percent to 5.75 percent, would be temporary. The Legislature raised the rate again the next year, “temporarily,” to 6.25 percent.

…Instead, in 2011 a formula created in 2002 dropped the rate to 5.25 percent, where it remains — 24 years after the first “temporary” increase, and 12 years after the voters demanded a rollback to 5 percent.

Ms. Anderson further reminds us:

The Massachusetts tax burden is the fourth highest in the nation per capita, eighth highest relative to personal income. The state is not suffering from a lack of taxes; it is suffering from a lack of accountability for the taxes already paid. The ongoing scandal over electronic-benefits cards is a maddening example of this.

I think taxpayers in the Commonwealth of Massachusetts might be a little less grumpy about their tax rate if we didn’t routinely see stories about the Commonwealth’s waste of taxpayer money. Part of that waste is due to the fact that politicians like to spend other people’s money, but another part is the fault of the voters who keep electing the same people year after year. Until someone holds the Massachusetts legislature accountable, they will continue to be out of control. It also would help to have two viable political parties in the Commonwealth, but that may be a pipe dream!

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It’s The Spending–Not The Taxes

On Friday Representative Darrell Issa posted an editorial in the Washington Times about the current fiscal cliff debate in Washington.

He begins the article with some recent history on American tax policy:

Twenty-six years ago, President Reagan implemented significant tax reforms that lowered the individual income tax rate, limited deductions and brought equality to tax rates across all levels. Before that reform, there had been 15 different marginal tax rates reaching levels as high as 50 percent for top brackets. By the time Reagan left office, the number of brackets had been reduced to two: 15 percent and 28 percent.

In 1993, President Clinton raised the top two income rates to 36 percent and 39.6 percent while also raising the corporate tax rate, increasing the taxable portion of Social Security benefits and increasing income taxable for Medicare. This is what has become known as the “Clinton tax rates.”

In 2001, President George W. Bush changed the rate from 39.6 percent to 35 percent, lowered the capital gains and dividend income rates, and expanded credits and deductions such as the Child Tax Credit and the Earned Income Tax Credit.

The current discussions in Congress are centered on the idea of raising taxes–not on cutting spending. What would be the impact of raising taxes on the rich?

Representative Issa points out:

If you raised taxes on the top income bracket, you would generate around $1 trillion over 10 years. The past four years under President Obama have resulted in trillion-dollar deficits each year. At this rate, in 10 years we’re looking at $10 trillion in new debt. At best, the “tax-the-rich” proposal is just a 10 percent solution.

Government spending has traditionally been about 18 to 20 percent of America’s Gross Domestic Product (GDP). Under President Obama, it has been about 24%. Since tax revenue is about 18% of GDP for year, the source of the deficit is obvious. Even when taxes are raised, tax revenue remains about 18% of GDP.

Representative Issa concludes:

The other side tries to boil this down into a seven-second sound bite about taxing the rich and people paying their fair share. In 2009, the top 10 percent of earners in the United States already paid more than 70 percent of federal income taxes.

This isn’t about fairness and unfairness. It’s about taxing and spending, and the federal government has spent enough.

The federal government collects more tax money from all Americans than the Medieval lords collected from the serfs. It really is time for that to stop.

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Twisting The Numbers To Change The Story

Yesterday the Daily Caller posted a story about Bloomberg News and its reporting of a poll it conducted last week. The poll was taken by an Iowa-based firm and asked Americans how they felt about the coming ‘fiscal cliff.’

The article states:

A poll conducted last week by an Iowa-based firm showed Americans are conflicted about whether or not to support raising tax rates on wealthy Americans to avert the so-called “fiscal cliff.” But that’s not how Bloomberg News, which commissioned the poll, reported the results Thursday.

Somehow, when the story was reported, the headline read, “Americans Back Obama Tax-Rate Boost Tied to Entitlements.” So what did the poll actually show? The article reported that fifty-eight percent of the people polled thought President Obama was right to insist on raising taxes on the wealthy as a precondition for talks about the fiscal cliff. However, when you take a closer look at the numbers, you find that fifty-two percent responded that they preferred limited tax breaks to a tax-rate hike. Thirty nine percent said that they wanted to see tax rates on the wealthy increase, and nine percent said they were not sure.

Please follow the link above to read the entire story. There is also an attempt in the story to convince the reader that raising taxes to increase government spending is a solution to our current economic problems.

Bloomberg news is a respected financial news source. They do a disservice to themselves and the American people when they do not accurately report the news..

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It Is Possible To Balance The Budget Without Raising Taxes

On Saturday the Washington Examiner posted an editorial about balancing the American budget. The editorial reminds us that everyone–rich or poor–will pay more in taxes after January 1.

The editorial states:

Liberal columnists love to point out that the top marginal rate on personal income was 91 percent in the 1950s and in the early 1960s. But the tax code back then was also chock-full of loopholes and benefits that let top earners escape such stifling tax burdens. As high as top marginal rates were, taxes as a percentage of GDP never rose above 19 percent, and in fact fell as low as 14.5 percent.

In fact, since World War II, federal taxes as a percentage of GDP have never risen above 20.6 percent and have averaged just under 18 percent. This has been consistent, regardless of changes to tax rates.

This fact is also confirmed in the Laffer Curve. There is a point at which tax increases actually result in less revenue. We need to keep this fact in mind as we discuss what to do about the ‘fiscal cliff.’

There are two think tanks that represent the two ways of thinking about solutions to the ‘fiscal cliff’:

Obama’s favorite think tank, the Center for American Progress, submitted a plan that calls for the federal government to eat up more than 20 percent of the American economy through taxation every year, in perpetuity. Being the liberals that they are, CAP calls for even higher levels of spending — above 22 percent of GDP by 2022 alone.

Contrast CAP’s plan with that of the Heritage Foundation. It returns taxation to just above the historical U.S. average at 18.5 percent of GDP. By cutting spending to pre-Great Society levels, the Heritage plan not only balances the budget but actually begins to lower our cumulative national debt.

Taking money from people who earn it and giving it to people who don’t earn it is not a solution to anything. Until Washington stops using American taxpayers as vehicles to get re-elected, nothing will be accomplished.

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The Impact Of Raising Taxes On Dividends

This is a chart from today’s Wall Street Journal:

1dividends

The chart shows what happens when taxes on dividends is raised. The editorial that goes with the chart goes into the details of why this happens. Please follow the link to read the details.

The chart was posted in response to President Obama’s proposal to raise taxes on dividends from today’s rate of 15 percent to 39.6 percent, actually 41 percent after the phase out of deductions and exemptions, and a 3.8 percent surcharge, giving you an effective rate of 44.8 percent. The new rate would only apply to those making over $200,000 a year (individuals) or $250,000 (couple).

Exactly who would be impacted by this increase in the dividends tax? Actually, senior citizens would be hardest hit (yes, that is one of many reasons I am up in arms about this!). As you can see from the graph, when the tax rate on dividends goes down, corporations pay more dividends. Many senior citizens live on their dividends–if dividends decrease, their income decreases. Paying fewer dividends also devalues stocks–thus impacting everyone’s stock portfolio or 401k plan. Everyone loses.

The article concludes:

Seldom has there been a clearer example of a policy that is supposed to soak the rich but will drench almost all American families.

We need to stop worrying so much about soaking the rich and worrying more about making tax policy that allows everyone who works hard to become rich!

 

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Something That Wasn’t Mentioned In The State Of The Union Speech

I haven’t written anything about the State of the Union speech because I thought it was a political exercise. This is the ‘silly season’ and truth is a rare commodity in political speeches right now (not that it is always there in other times). However, the Wall Street Journal posted an editorial today that makes some very good points.

This is the chart from the editorial:1buffettrule

As you can see, the federal tax rate on long-term capital gains has varied a lot over the years. The article points out the fallacy of the “Buffett Rule” that President Obama is proposing which would make wealthy Americans give more of their money to the government. The Congressional Budget Office reports that the effective income tax rate of the richest 1% is actually about 29.5%. That is the rate you come up with when you include all federal taxes–such as the distribution of corporate taxes. That is about twice the 15.1% rate paid by middle-class families.

Investment income has already been taxed once. There is no reason to tax it again unless you are trying to redistribute wealth.

The article points out:

As the nearby chart shows, the rate has never since risen above 28%, and the last time it moved that high was in 1986 as part of the Reagan-Rostenkowski tax reform that also cut the top marginal income tax rate to 28% from 50%. With income-tax rates so low, a differential was arguably less necessary—though it’s worth noting that capital gains revenues fell dramatically after that rate increase.

A decade later Bill Clinton agreed to cut the rate back to 20% as part of the balanced-budget deal with Newt Gingrich. Capital gains revenues soared, helping to balance the federal budget. Nearly every study estimates that the revenue-maximizing tax rate from the capital gains tax is between 15% and 28%. Doug Holtz-Eakin, the former director of the Congressional Budget Office, says that a 30% tax rate “is almost surely above the rate that maximizes tax revenues.” So it’s likely the Buffett trick would lose revenue for the government.

So if we are in a time of federal deficits, why would you change the tax code in a way that would lose revenue for the government? Unless you are using the tax code to redistribute wealth, it makes no sense.

 

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