Congress recently passed the Tax Cuts and Jobs Act, marking the biggest tax reform in 30 years. Here are the top five things I like about this bill as well as my top five dislikes. As always, I welcome your opinion.
TOP FIVE LIKES
1. A tax deduction for just about everyone
The original bill called for our seven tax brackets to be reduced to four. By doing that, it was possible that some people would see a tax increase. In addition, there were a lot of deduction eliminations that would have raised taxes on the middle class and wonky things like counting graduate school tuition deferrals as income. Fortunately, the final bill doesn’t look anything like the earlier versions. Basically, it keeps the seven brackets and reduces that tax in each bracket down 2%, while maintaining most of the deductions we’re used to having. It also doubles the standard deduction. If you currently don’t itemize, you probably won’t in this bill, which means you’ll definitely pay less taxes.
As a side note, I want to address the Democrat’s talking point that this is a tax bill that favors the rich, because it truly is misleading. Let’s say I gather 5 people into a room, and I tell them that I will cut their taxes by 2%. Each of these five people make different incomes – $25K, $50K, $75K, $100K, and $500K. Here’s how much each of them would save respectively: $500, $1,000, $1,500, $2,000, and $10,000. Notice that because we’re dealing with percentages, the person who makes $500K saves more dollars than the other four combined. Now in this scenario, I have 1 person in lower class, 3 in middle class, and 1 in upper class. So if we were to break this down and ask, “Which class saves the most?” The answer is the upper class because they make exponentially more than any of the others. So when Democrats say that this primarily benefits the highest income earners, that’s how they’re making that determination. But it’s really an unfair way of looking at it. Furthermore, the lowest tax bracket of 10% stays the same, so people in the lowest bracket won’t see a percentage decrease in their taxes. So right there someone could make the argument that this doesn’t benefit the low income earners at all. However, keep in mind that only about 55% of American households pay taxes and the standard deduction is going to double. If you are in the low income bracket and you don’t pay taxes now, you definitely won’t pay taxes under the new plan. So do the low income earners get a better situation? Not really. But I’m not sure how you much better you can get than not paying any taxes.
2. SALT deduction limits
This is going to be an unpopular opinion among those that live in high tax states like California, New Jersey, and New York, but I’m happy that the state and local tax deductions (SALT) remain but are capped at $10,000. Some states have levied enormous taxes on their citizens, and everyone shrugged it off because you can deduct state taxes from your federal taxes. What that means is that the general public is subsidizing the cost of living for people that choose to live in high-tax states, as well as subsidizing bad economic policy that has put many states in debt. By capping the amount one can deduct, it means we all get an equal deduction, whether you live in Wyoming or Washington D.C. Hopefully this incentivizes local politicians to run on good fiscal policy and reduce taxes on their citizens.
3. Incentivizes American Corporations
Many Democrats argue that this bill heavily favors corporations. That’s absolutely true. This lowers a company’s tax burden from 35% to 21%, which is an enormous break. The bill favors public companies, because as Republicans see it, the economy is based on the stock market, which is made up of public (i.e. larger) companies. This bill does a few powerful things for corporate America business growth. First, it lowers the tax burden. Secondly, it changes the tax structure from a global tax (where companies get taxed on all income generated around the world) to a territorial tax structure (where companies are generally just taxed on money made in the U.S.). The global tax structure has encouraged companies to shelter their money overseas to avoid paying additional taxes in the U.S. So to encourage companies to bring their assets back into the U.S., businesses can do so and pay a much smaller tax on cash and other assets. The bottom line is that this incentivizes businesses to set up shop in the states and reinvest their assets here, whether that’s building more plants or reinvesting cash.
4. 529 Savings Plans can be used for private schools
I come from a middle class family. My parents both worked full-time jobs to put me and my brother through private school. In addition to paying for our private school tuition, my parents also had to pay for public school taxes. And unlike public school taxes which could be deducted from federal taxes, private school tuition was not deductible. The ability to use a 529 savings plan for private schools just makes sense, and no, it’s not just a deduction for the wealthy. As a graduate from a private school, a former private school teacher, and now a sales rep that works exclusively with private schools around the country, there are many families in lower economic situations that send their kids to private schools. Private schools save states an enormous amount of money, and in many states, public schools still get money from families that pay private school tuition.
Just before this bill passed, a provision was removed that would allow homeschool families to also use the 529 Savings Plans for homeschool. I’m a former homeschool parent, so you would think that I would be in favor of this provision. I’m actually not, and I’m glad it got removed from the bill. I see a provision that allows homeschool tax deductions getting abused very easily. As homeschool parents, we considered the world a learning experience. If that provision passed, I would use the savings plan for all sorts of things like travel, dining at exotic restaurants, etc. I’m sure I could find reasons to justify it, but it would get loosey-goosey really quickly, especially among families wanting a tax break but not really wanting the responsibility of giving a good homeschool education to their children.
5. Removal of Obamacare Mandate Fine
I’m on the fence about this one. I’m personally one that feels that everyone should have health insurance, in the same way that most states require people to get shots in order to attend school or people to have car insurance in order to drive. However, here’s my problem with the Obamacare mandate. When Obamacare was created it stipulated that everyone had to have specific types of plans or pay a fine. So, for example, friends of mine who are healthy and had a high deductible insurance plan (catastrophic type of plan) suddenly realized that they had to buy a much more expensive plan that they really didn’t need. So whereas Obamacare was meant to make healthcare more affordable for everyone, it failed in the sense that it often required people to buy more expensive plans by disqualifying anything that didn’t meet certain parameters. So for those that can’t afford health insurance, this really doesn’t help them. It just forces them to pay a fine. I’d love to see every American have health insurance, but I’d love for people to be able to choose the plan that’s right for them. What’s it say about a healthcare program when a ton of people opt out of it? Maybe
TOP FIVE DISLIKES
1. It’s expensive
$1.5 Trillion over the next ten years is the estimated cost of the new tax plan. However, it’s actually more expensive than that. Republicans needed to stipulate that the individual tax breaks were temporary and would expire in order to keep the cost under $1.5 Trillion to prevent Democrats from filibustering. When those tax breaks expire, I’m fairly certain no congressman is going to vote to eliminate them. So by renewing the tax breaks for individuals, it will cause this bill to be more expensive than the estimate. Democrats have used the addition to government debt as a talking point, which is ironic, since most Democrats are anything but fiscally responsible.
There’s another way to look at this. This isn’t like the government is paying money. It’s simply taking a paycut. If we took a paycut, we’d probably have to reduce our spending. In my opinion, there is a lot of unnecessary federal spending. Hopefully this will result in a vast reduction of federal spending. If not, then we’ll just spiral into bigger debt.
2. Deductions heavily favor corporations
Democrats’ talking point about this tax plan is a handout that heavily favors corporations over individuals. That’s a point Republicans are willing to concede, but the optics of that don’t bode well for Republicans. It’s easy for Democrats to rile up people with facts such as “individual tax breaks will expire, corporations get a 14% tax break while individuals only get 2%, and corporations can use that money to give bonuses to the well-paid executives.” The last point is particularly meaningful. Republicans and Democrats missed a real opportunity to work together here and incentivize tax breaks for corporations that help the average Joe Worker. There are a few in there, but they aren’t nearly as progressive as Democrats would want. Unfortunately, everyone was too busy trying to not work together that this didn’t happen. Republicans believe that the tax breaks will result in companies paying more, hiring more, etc. However, at the end of the day, there’s no promise or incentive for companies to do so. We’ll see what corporations do with this extra money.
3. Taxes aren’t any simpler
The original plan was to simplify the tax code. The White House had the idea that it would be great if you could just do your taxes on a postcard. As someone who spends probably 30+ hours doing taxes at the last minute in April, I loved this idea. However, in order to make that a reality, you pretty much have to eliminate all of the deductions. Early versions of this bill which eliminated SALT and adoption deductions, made constituents on either side of the aisle angry. So while fortunately those popular deductions remain, unfortunately, it means that Turbo Tax and many hours of tax prep are still going to be an April reality.
4. More uninsured Americans
With the Obamacare mandate fine gone, most believe that many Americans will choose not to buy health insurance. Because there will be less people (generally the healthy ones will abstain) buying into these healthcare programs, the plan premiums are sure to increase, resulting in less people being able to afford insurance. That isn’t a good thing, especially for those that truly need a good insurance plan. I’m not sure if this will cause Obamacare to totally implode or not, but if it does, I bet we’ll see a single payer socialist form of healthcare in the not-too-distant future. That type of system will be far more expensive than any tax bill.
5. More Partisan Rift
I really do hate our two-party system. I mean, I really loathe it. I’m not sure if the partisan divide is worse these days, but given how biased the media is, it sure seems like it. Unfortunately, this process did not help things. From day one, Republicans felt that they could get the necessary votes to go in this alone, and so they did. And from day one, Democrats postured against this bill and threw temper tantrums along the way. So while I generally like the final bill, I think it did a lot of political damage, and it probably will cost Republicans some seats in the next election. It’s quite a thing when we’ve become so partisan that Democrats can convince their base that a tax break is government looting. I’m shaking my head at that logic.