Never in the history of tax law change, has there been so much at stake as there is right now. Not because of what is being proposed, but because of what is behind what is being proposed. Understanding the tug of war that is going on in Washington is almost as important as the changes themselves, because (for those who have not been paying attention), it is all about the votes…
Before we begin, if you do not know the tax proposals being put forward, please read our article entitled Senate and House Tax Reform Comparison.
Tax Reform – The Great Divide…
There are currently three arguments being made for tax reform. The first is the House of Representatives version, who “represents” the little guy. This group has put forward a tax package that seems to take care of low and low to middle income America. It is not perfect by any means, but it is directionally aimed at helping low income families. The House of Representatives has historically been the representatives for the masses. Very pragmatic, but not always considered in their views. Next is the Senate. They are the far more analytical in their approach. They have put forward a package that is more USA friendly, but at some expense to the citizens. What we mean is that their package does not give as much back, but it is less likely to put the US under financial strain than the House version. Both the House and the Senate version would require the US to become far more efficient in the way it handles its money, or we would, in the long run, go bankrupt. Both are proffered by Republicans and (generally) do not have Democratic support.
The final argument is by the Democrats, who feel that both versions are unpalatable. They cut too much and force the government to make spending decisions that we should not be prepared to make. If the Democratic view is correct, then many special programs will go the way of the dinosaur and our country, and its great way of life, will be forever changed…
Now the Reality…
Change happens slowly in industrialized nations. Yes, the words being put forward are both powerful and even scary, but the reality is that everyone from “special interest” to “get out the vote” holds a not so subtle gun to the heads of those politicians that would do more harm than good. It would difficult to pass any tax reform (quickly) if it is not a good idea to a reasonable person. Further, we as a nation have politicians that have a history of kicking the can down the road for the next administration to deal with. Instead of fixing the spending problem, we raise limits and ages and reduce payments and tax deductibility.
Look at the mortgage tax deduction as a shining example of this point. 25 years ago, if you had a $2 million mortgage on a $3 million home you could deduct all of the interest paid. Today you are limited to interest paid on mortgages less than or equal to $1 million. Any excess is non-deductible.
Yes, a million-dollar mortgage is still out of reach for many people, but not nearly as many as you’d think. If you live in NYC or San Francisco, California, the chances are good that your home will cost more than $1m. You don’t need to be rich to afford it, just a dual income family with both adults making a middle-class income. The House proposal will reduce the deductibility of interest to the first $500k of mortgage. Both versions reduce or eliminate deductibility of property taxes paid.
So How do We Feel about the Tax Reform Being Put Forward?
We’re mixed. On the one hand, they are both good for a certain segment of the population. Either the really-rich or the really-poor. Middle and upper middle gets hit pretty-hard, and that is where most of our readers fall.
We also understand and support the need to eliminate double taxation, and so we favor the elimination of the estate tax. We’d like to see this go further and eliminate taxes on dividends because they have already been taxed at the corporate level in the US so taxing them again is double dipping on the same dollar earned. If the argument holds true for estate tax then it should hold true for the dividends.
20% corporate tax limit on “non-passthrough” corporations only?
We’d like to be the tax attorney who converts all the LLCs to C Corps over this one because he/she will make a fortune. What we like about this is that it probably will do what it intended to do, which is to bring back offshore business to the US, particularly if it is tied to a tax holiday on offshore income. What we’re concerned about is that the amount of income generated in foreign jurisdictions by US companies, while plentiful, is not more than the income generated on US soil. And the government can’t give a 20% tax on returning corporations only. So, this provision gives back a lot more than it should in order to bring those dollars back home.
The next issue is what Deductions.TAX calls a lack of “fair is fair” provision. If you own a passthrough corporation (LLC or S Corp) it appears you are left behind on this one and taxed at the owner’s personal tax rate. References to basketball players incorporating themselves aside, most LLC Corps are small hardworking entrepreneurs – the heart of America. This gives big business a leg-up over small entrepreneurs…
We think this has some work to do. Conceptually, tax reform is great, but execution is of paramount importance in order for this to come off without a hitch.