Take The Politics Out
Is there a reset button? I think a majority of us would like to start fresh!
In a recent post about budget deficits I shared information including graphs on total taxes paid by each income group – high earners and everyone else. In addition, here are a couple of recent articles from University of North Carolina and the Tax Foundation on who pays the majority of federal income taxes.
Those with higher income pay a higher percentage of their income to taxes which include Social Security, federal and state income taxes, plus other state and local taxes. Some of these taxes are progressive and some are regressive.
We have to decide as a society what the correct percentage is for all taxpayers to pay. It is an important discussion to have. My hope is that this discussion will be based on good collaboration and not on browbeating with nonsensical yelling points (the current way we do it!).
The last tax reform in 2017 was equitable with two clear winners. The 2017 tax reform favored small business owners and parents of children under age 17. I geeked out and ran the numbers, I discussed it in this article, The Skinny on Tax Reform.
Addressing taxes means deciding what we deem as a fair overall tax burden and what works. It may be nonsensical, but when we raise taxes, we can actually collect less. The problem with increasing taxes is that people figure out strategies to reduce their taxes or it disincentivizes them to earn more. Incremental increases tend to work, but whacking someone over the head with a tax two-by-four will reduce the extra tax collections. Let’s be SMART and FAIR about it.
We don’t want to take the approach of demonizing and punishing people. We don’t even know these folks. I think we have to be better and smarter than that. Even if we can, it doesn’t mean we should.
My Dad always said, “you get more with honey than you do with vinegar.” We are all in this together, let’s figure out what works. My multi-decade experience has shown me that people are willing to pay their fair share of taxes. I often hear, “yes I owe more taxes, but that means I had a good year…”
We also have to address costs and waste in the system. At some point (we are probably getting close) the markets will require us to get real on spending far more than we take in.
THE COST SIDE:
Funding New Social Programs
If we want to have more programs, we will have to pay for them with additional taxes. You don’t think another society since the beginning of time has thought of – we are powerful, we can just borrow or print money ad infinitum? It doesn’t work; investors (the folks loaning us the money) won’t allow it. Uninformed hubris will get us into trouble.
We also have to figure out the best, lowest cost way of funding the programs that we want to add or enhance. Some of these programs (childcare) do not have to go through the federal government, which adds an extra layer and thus extra costs.Tax breaks/credits that keep the money in taxpayer’s pockets is a more efficient way of funding certain programs than the government collecting taxes and distributing it to the providers.
Third party pay (e.g. the government collecting taxes or borrowing money and distributing it to the service provider) tends to drive up the costs of services because the consumer (us) doesn’t negotiate or understand the cost. We see this with health care and education.
Also, increased demand with money from the government will crowd out the supply. We could find childcare costs rising and lack of availability. That demand will chase the supply and create higher prices (inflation) like we see with healthcare and education.
If we agree that these are good programs, we then have to figure out the best way to implement them. Again, let’s be smart about it.
Funding Existing Social Programs
Social Security anyone?
At this point, it is anticipated that Social Security will go from an annual funding surplus to a deficit in 2033. Currently there is enough money coming in to cover what is going out. Many feel we have squandered the surpluses over the past several decades.
Remember presidential candidate Al Gore’s “lock-box” comment? Hmmm maybe we should have used it for paying down the national debt or infrastructure spending that the government (us) could have made money on so we would be ready for 2033?!? Obviously we didn’t do that.
Poor fiscal management by our elected officials – both sides of the aisle. How fixing Social Security is not on the lips of all politicians is beyond me. We have ourselves to blame. The bill (higher taxes) to our children and grandchildren is astronomical.
We have done them a great disservice. The longer we wait to address this problem the worse it will be for all of us, especially younger generations.
THE REVENUE SIDE:
What Are the Proposed Tax Law Changes?
Jumping from the costs of proposed and existing programs to how we pay for it.
At this point we are still in the draft phase of the legislation. From various sources, this is what has been proposed.
For Individuals
- Tax Increases
- Increasing the top individual rate from 37% to 39.6% (taxable income over $400,000 single, $425,000 head of household and $450,000 married filing joint)
- Increasing the capital gains tax rate from 20% to 25% for taxpayers in the top 39.6% tax bracket
- Imposing a 3% surtax on Adjusted Gross Incomes (AGIs) over $5 million
- Expanding the 3.8% Medicare investment income surtax to more income from pass-through entities for taxpayers in the highest tax bracket
- Limiting the Qualified Business Income (QBI) deduction (Section 199A) to taxpayers with incomes not greater than $500,000 for married filing joint and $400,000 for single taxpayers (effectively making all businesses subject to the current specified service trades or businesses (SSTBs) rules.
- Increasing the holding period from 3 to 5 years to qualify for capital gains treatment on carried interest.
- Eliminating Roth conversions for taxpayers with incomes greater than $400,000
- Limiting Roth IRA and Roth 401k conversions to strictly pre-tax money. This would kill the “Back-Door Roth Conversion.”
- Lowering the lifetime estate and gift tax exemption from $11.7 million to $6 million
- Eliminating valuation discounts on non-business assets transferred to heirs or gifted during lifetime.
- Tax Breaks
- Higher child tax credit
- Higher credit for child and dependent care
- Higher tax credit for retirement savings for low income taxpayers
- New tax credit for family caregivers
- Enhanced credits for energy saving home upgrades and purchase of electric vehicles
- Unpopular (in some states) Continued Provision
- It has been discussed, but there is no anticipated relief from the SALT (State and Local Tax) $10,000 maximum deduction.
For Corporations/Businesses
- Increasing the tax rate for larger corporations from 21% to 26.5%
- Providing more tax breaks for green energy businesses
- Modifying various multinational corporation taxes
- Expanding credits for construction of low-income housing and historic buildings rehab
The Administration’s proposals would also beef up the IRS with $80 billion to expand the workforce for more audits and update technology.
As usual, what ends up in the final legislation could be much different but at least we have a financial planning framework for what the changes could look like.
It is too early to strategize how to plan for the changes. Please stay tuned, our financial advisors will be all over it when we have more guidance on what the tax law changes will look like.
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