6 Important Take-Aways From the Tax Reform Effort

The new tax law does more than shake up our system. It also shines a light on whom politicians are actually working for. Hint: It isn't you.

6 Important Take-Aways From the Tax Reform Effort Photo by littlenySTOCK / Shutterstock.com

As a small-business owner, I’m happy with tax reform. It will lower the business income taxes I pay, as well as slightly reducing my personal taxes.

Like everyone else on the planet, I like the idea of reduced taxes. But as a consumer reporter, I’m obliged to point out six lies you’ve been spoon-fed about the Tax Cuts and Jobs Act.

I’m not suggesting the bill itself is necessarily bad. Fact is, until the law has been in effect for a period of time, we can’t be certain what the effects will be. What we can be certain of, however, is that not all of what you’ve been told during the path to this bill’s passage is true.

Every responsible citizen needs to understand the motives and methods of those we’ve elected to represent us, and this law offers a clear view of both.

This isn’t about Democrats or Republicans. It’s about politicians and the masters they serve.

1. Politicians promised tax reform is about you. It’s not.

Virtually every politician pushing the tax bill stressed its primary purpose would be to deliver tax relief to all Americans, especially those in middle class. That’s logical, since we’re the ones they’re supposed to be representing.

Here’s President Donald Trump from a speech on Dec. 13:

We want to give you, the American people, a giant tax cut for Christmas. And when I say giant, I mean giant. … It’s a massive tax cut for the middle class.

No, Mr. President, it’s a massive tax cut for corporations.

According to Bloomberg, the actual tax relief for individuals earning between $40,000 and $100,000 will be between $15 and $23 a week. Corporate tax rates, on the other hand, will be cut nearly in half, from today’s maximum of 35 percent to a new maximum of only 21 percent.

In addition, while the tax cuts accruing to regular Americans automatically go away after 2025, cuts for business are permanent.

From Consumer Reports:

The main focus of both bills is a huge cut in corporate taxes … For individuals, the two pieces of legislation offer more modest and less permanent breaks.

Even some Republicans acknowledge whom this bill is really for. Here’s what Republican Rep. Mark Sanford of South Carolina said:

Fundamentally the bill has been mislabeled. From a truth-in-advertising standpoint it would have been a lot simpler if we just acknowledged reality on this bill, which is it’s fundamentally a corporate tax reduction and restructuring bill, period.

The new law also contains a provision allowing corporations with profits stashed overseas to bring them back to the U.S. and pay as little as 8 percent in taxes. That’s a lot less than you’ll likely pay on your income, and a pittance compared with the maximum rate of 35 percent they were facing prior to this law.

This is an idea that’s been trotted out before, and not very long ago. From CNBC:

In 2004, companies were allowed to bring their profits back home at a tax rate of 5.25 percent. But rather than pump that money into the economy, most of it went to shareholders, with some of the biggest recipients actually cutting employment in subsequent years.

For decades the corporate share of the American tax burden has been shrinking. As independent Vermont Sen. Bernie Sanders pointed out a few years ago, corporate taxes made up 33 percent of all government tax revenue in 1952. By 2013, corporations were contributing just 10 percent of the total.

After passage of this tax bill, their share will shrink more.

Lesson: Politicians are sometimes more focused on rewarding lobbyists and donors than you.

2. Politicians promised they care about our nation’s debt. They don’t.

Since this bill cuts taxes without corresponding cuts in government spending, estimates are that it will add up to $1.5 trillion to our $20 trillion national debt over the next 10 years.

In theory, when corporations pay less taxes, they have more resources available to become more profitable, hire more employees and pay those employees more. As companies and workers make more, they pay more in taxes. Those promoting the bill insist this anticipated increase in tax revenue will offset the cost of the law, making it revenue neutral.

From U.S. Treasury Secretary Steven Mnuchin on Sept. 13:

It will be revenue neutral under our growth assumptions. We can pay for these tax cuts with economic growth.

To back up his words, in mid-December, Mnuchin’s Treasury Department produced a one-page “analysis” suggesting the tax plan would create enough new revenue to offset its cost.

Unfortunately, the bill’s supporters seem to be the only ones sharing this rosy outlook. Of 38 economists surveyed by the University of Chicago, 37 said the tax plan wouldn’t create enough new revenue to offset the cost, swelling our nation’s debt. The 38th said later that he had misread the question.

The nonpartisan Joint Committee on Taxation examined the tax bill passed by the Senate and found that only $400 billion of the $1.5 trillion cost would be recouped over 10 years, blowing a $1 trillion hole in the deficit.

You don’t have to go back very far to find Congress humming a much different deficit tune. In 2009, in the depths of the Great Recession, President Barack Obama pitched a $787 million stimulus bill to help the economy recover by funding such things as infrastructure projects. The legislation passed, but Senate Minority Leader Mitch McConnell and nearly every other Senate Republican voted against it.

McConnell’s words at the time:

Yesterday the Senate cast one of the most expensive votes in history. Americans are wondering how we’re going to pay for all this.

Ironically, he also said this back in 2009:

Someone mentioned the other day, one of my colleagues, just to put a trillion dollars in context. If you started spending the day Jesus was born and you spent a million dollars every single day you still wouldn’t have spent a trillion dollars. It’s a lot of money.

Now that both corporate profits and cash are at record levels, the same people who fought against deficit spending to combat the Great Recession are now fighting to use it to slash corporate taxes.

Lesson: Politicians hate legislation that adds to deficits, unless they’re the ones proposing it.

3. Politicians promised that filling corporate pockets will help you. It won’t.

Tax reform obviously benefits corporate America, since it permanently reduces their tax bills by more than 40 percent. Those supporting the Tax Cuts and Jobs Bill insist that padding the pockets of “job creators” helps us all. As mentioned above, the idea is to give business more money, which they’ll then use to expand, hire more people, give raises and otherwise stimulate the economy.

This is known as “trickle down” or “supply side” economics.

Throwing money at those at the top in hopes it will ultimately reach those below is a tactic that’s been tried many times. Whether it actually works is hotly contested, although there’s plenty of evidence it doesn’t, primarily because those receiving the benefit don’t always use it in ways that benefit others.

The theory behind supply side economics is logical enough, because companies could use their windfalls in ways that could stimulate jobs. The fly in the ointment: They could also use the money for share buybacks, fatter dividends or paying down debt. They could just put the extra money in the bank. Any of those options help only their shareholders.

Wondering why the stock market took off as tax reform became increasingly likely? Now you know.

From Bloomberg:

Major companies including Cisco Systems Inc., Pfizer Inc. and Coca-Cola Co. say they’ll turn over most gains from proposed corporate tax cuts to their shareholders, undercutting President Donald Trump’s promise that his plan will create jobs and boost wages for the middle class.

Alan Greenspan, a respected former chairman of the Federal Reserve Bank, said this recently on CNBC:

The Republican-sponsored tax overhaul plan will do “very little” to spur real economic growth but could push inflation dangerously higher.

From an editorial by Michael Bloomberg, billionaire businessman:

It’s pure fantasy to think that the tax bill will lead to significantly higher wages and growth, as Republicans have promised. Had Congress actually listened to executives, or economists who study these issues carefully, it might have realized that.

Lesson: Businesses get breaks you’ll never have because they buy political influence you can’t afford.

4. Politicians promised they’d close loopholes. They didn’t.

There are few things Trump and Obama agreed on, but one was their hatred of the so-called “carried interest” provision, a loophole allowing some hedge fund, private equity and real estate billionaires to pay only 20 percent tax on their income, while less-connected folks like us were expected to pay up to 40 percent.

Bills repealing it were introduced as far back as 2007, but none ever passed.

Trump, however, promised to get rid of it once and for all. Here he is in 2015:

The hedge fund guys won’t like me as much as they like me right now. I know them all, but they’ll pay more. I know people that are making a tremendous amount of money and paying virtually no tax, and I think it’s unfair.

Here’s White House Economic Adviser Gary Cohn just weeks ago:

The president remains committed to ending the carried interest deduction. As we continue to evolve on the framework, the president has made it clear to the tax writers and Congress. Carried interest is one of those loopholes that we talk about when we talk about getting rid of loopholes that affect wealthy Americans.

Can’t get much clearer than that. So what happened?

While slight changes were made to carried interest in the final bill, the fat cats will still keep their 20 percent tax rate. Here’s how Steven Rosenthal, a senior fellow at the nonpartisan Tax Policy Center, described the change:

That’s a travesty. It is a cosmetic change to make it seem like something is being done with carried interest when nothing is being done.

Lesson: It pays — literally — to know people in high places.

5. Politicians promised this law would simplify taxes. It won’t.

Over and over we were told our complicated tax system would be simplified by reform. You might have seen politicians holding up postcard-sized “tax forms,” claiming that’s all you’d soon need to file a tax return.

There are things in the new law that simplify your taxes. For example, doubling the standard deduction means far fewer Americans will have to search for itemized deductions and the elimination of many itemized deductions, such as alimony and interest on home equity loans means there will be fewer to find.

But there are other parts of the law that will make our tax system more complicated than ever. Consider, for example, that two people working in the same place doing the same job could soon be taxed at completely different rates. Employees will continue to use traditional tax tables, but contract workers can essentially form mini-companies and get significant breaks.

This is the first time in the history of our tax code that employees will pay higher rates than the self-employed. It’s also the first time that corporations will pay a rate far lower than citizens pay.

From The New York Times:

“Wage income will be the highest taxed income,” said John L. Buckley, a chief of staff for Congress’s Joint Committee on Taxation in the 1990s. That’s what more than 80 percent of working Americans get. “I think it’s grossly unfair,” he added. “Somebody working for a wage gets a higher tax rate than somebody doing the same job under a different legal structure.”

It should be obvious that offering advantages to some taxpayers over others makes things more complicated, not less. It also should be obvious that this will invite abuse.

Employees in the highest brackets will try to make part of their income non-taxable by forming an LLC and becoming an independent contractor. The owner of a profitable LLC may want to incorporate to take advantage of the new 21 percent tax bracket.

Expect shenanigans: You won’t be disappointed.

Lesson: Politicians often promise to simplify things, but rarely deliver.

6. The president promised he’d be hurt by the tax bill. He won’t.

As our president stumped for tax reform, he’s made comments like, “This is going to cost me a fortune,” “This is not good for me,” “I think my accountants are going crazy right now” and “Some of my wealthy friends care. Me, I don’t care. This is a higher calling.”

Not since January of 1998 when President Bill Clinton uttered the infamous, “I did not have sexual relations with that woman” has a U.S. president looked into a TV camera and said something so laughably false.

From The Washington Post:

“The notion that the president wouldn’t benefit is absurd,” said Steven M. Rosenthal, a senior fellow at the nonpartisan Tax Policy Center who has reviewed the bills. “In either plan, he benefits immensely.”

Since Trump reneged on his promise to publicly release his tax returns, we can’t be sure, but we can safely assume he’s in the highest bracket, which will now be lower. That benefits him. We also know that he owns his many businesses as either corporations or as “pass-through” entities, both of which will now pay lower taxes. That benefits him. Doubling the estate tax exemption, another part of the bill, also will benefit his family.

With the exception of limiting itemized deductions, which would negatively impact his personal taxes, there’s virtually nothing in this bill that doesn’t benefit our president. His claims to the contrary have earned the maximum of four “Pinocchios” from the Washington Post Fact Checker.

And literally at the last minute, Congress slipped in a loophole not contained in either the House or Senate version of the bill. It’s designed to lower the taxes paid by pass-through entities that hold large amounts of real estate. From International Business Times:

The new bill still has the same income provision but adds a loophole: depreciable property. So instead of being able to get a large tax cut only if you pay a lot of wages, now you can get the tax cut if you own a lot of property.

As I said a couple of months ago in “The Single Biggest Lie of Trump’s Tax Plan,” while you may or may not benefit from this law, the president, along with most people like him, absolutely, positively will. To suggest otherwise is a stretch, even for Trump. It’s also an insult to the intelligence to the American people.

Lesson: Power preys on ignorance. Don’t be ignorant.

If you’d like to learn more about the basics of the new tax law, Check out “How the Finalized Tax Reform Bill Will Affect Your Bottom Line.” If you’d like to dive into the details, the best summary I found was this one from the Tax Foundation. The New York Times has a nifty calculator that will give you a basic idea of how you’ll fare under the new law.

If you’d like to make your voice heard, comment below, on our Facebook page, or contact your representatives in Congress.

Stacy Johnson
Stacy Johnson @moneytalksnews
I'm the founder of Money Talks News and have spent the last 40+ years in the personal finance trenches. I'm a CPA, author of a few books and multiple Emmy recipient. I'm ... More

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