Musings: DKW Tax Reform Proposal

TAX REFORM
THOUGHTS AND IDEAS

I don’t like to complain without offering solutions or ideas. So, with that said, let me try to put something forth for you to consider on Tax Reform. First, however, please bear with me for a short bit as I explain some of my rationale. If you would rather just check out my proposed solution, you can skip to the bottom.

"It's going to make life very simple" and "This is a complete redesign of the code, so we can simplify it so much that 9 out of 10 Americans can file using a postcard-style system". These are statements from the President and GOP Rep Brady talking about their new tax reform proposal. Somehow, this administration seems to equate ‘simple’ with ‘better’. They tried to do it with healthcare and continue that line of reasoning with tax reform. Can these complicated issues be simplified and condensed? Sure. To a point. But, much of the bulk is in place in an effort to help clarify, protect, and create fairness and we’ll run into the same problems that caused those to be written again if they are simply cut out. Ironically, having said that, I have to make this fairly short since it is a blog and no one will read it if it gets too long!

Nobody really likes having to pay taxes. On the other hand, most people realize that taxes are an essential part of a well-functioning society, and it’s not a bad thing assuming that the government handles their financial responsibilities fairly and efficiently. Ah, there’s the crux of the problem!

I’m a fan of capitalism. Sure, it has its issues and creates a certain culture of greed, but it also allows for individual growth, encourages a working society, and rewards innovation and ingenuity. I’ve seen a lot of people say that it’s unfair that the wealthy have to pay more in taxes, that the bulk of tax money comes from the richest among us, and so on. On the other hand, way too many people have obviously never been in a situation where you don’t visit the doctor for serious issues, even with insurance, because you can’t even afford the copay or when paying a little more in taxes means making tough choices on essential living items or working more overtime. A small amount of tax difference among the lower earners is relative pocket change to the government, but can make a tremendous impact to the individuals themselves. Taking 35% of a millionaire’s income still leaves her with more than enough money to survive in luxury. On the other hand, taking 15% of someone making $25,000 a year already makes substantial impacts. In a Utopian society and an ideal situation, I’d love to see our government be in a position to be able to offer a low enough and sustainable tax rate that could be equal for everyone that wouldn’t hamper those in the lower and lower-middle class while encouraging financial growth for everyone. But, that’s not where we are. Not even close. With out-of-control national debt and deficit, we absolutely must be smart and efficient and the amount of money needed to be raised from taxes is far too much to be able to tax evenly across the board. In addition, on a good note, while perhaps not ideal, we are in a good situation right now in terms of jobs, low unemployment rates, and steady growth. Simply put, it is irresponsible to create cuts that add substantial amounts to the deficit while at the same time leaving very little wiggle room to help the economy when we face a strong downturn.

While I understand the general idea being pushed that increasing the standard deduction will cover the proposed cuts of some popular and more specific deductions, that mentality overlooks significant issues. One big issue is that many of those deductions help incentivize specific important segments of the economy and society. That would include higher education, home ownership, adoption, and charitable contributions, among others. There has been a lot of detail already published concerning these, so I won’t go into detail here. But, one that really gets me is the proposal on education and student loans. While it’s not necessary, it is a fact that a large majority of millionaires are college educated and have advanced degrees.⁷ Education is important. To make matters worse, tuition has increased so much over the past 20 years that middle class families are already struggling to justify getting advanced degrees while those in the top 10%, and especially the top 1%, are spending more on education¹. The obvious implications being that the wealthy will continue to pull away from those in the lower and middle class as they have easier access to basic opportunities, as has been building over the past several decades. There are some simple explanations as to why the gap between classes continue to widen. By taxing waved tuition and stipends while eliminating the deductions, a bigger burden will be created on many just starting out, a barrier placed on entry for many who would decide the cost isn’t worth it, and it would hobble future research and academic advancements. Another issue is that many give to charities because of the tax incentives in place for doing so. Of course, I would hope that many would still donate but I also realistically know that there would be a sharp reduction in charitable giving under the provisions of the proposed plans². In addition, including the provision that the individual tax cuts expire and including the cut to the individual mandate as part of tax reform is a cheap and irresponsible play.

I have one more issue with the proposed tax plans that hasn’t been discussed much. Having fewer tax brackets sounds nice and simple. But, it seems that those that write these have never been on the lower end of the spectrum because it’s common as one grows in many careers that their income will go from, let’s say, $45,000 one year to $45,500 the next (or $38,500 to $39,000 for the senate plan). This would result in a large jump in tax rate from 10% to 20% or 12% to 22% depending on the plan, which makes a substantial difference for this group. This is also the case with the current tax brackets as it jumps from 15% to 25%. While some people will see lower taxes at a certain income level under the new proposals, they don't solve the issue of some having to pay much more in taxes after being rewarded with a raise at work.

I haven’t even brought up corporate taxes yet. The misleading statement that the US has the highest taxes in the world just isn’t true. Plus, there are so many incentives, loopholes, and breaks that the effective rate is more around the 20% range as proven by our own US Department of Treasury.³ Again, I’m all for business succeeding and given fair opportunities to do so. However, large tax cuts right now are not the way to go. The money would go to large investors and the idea of most of it ‘trickling down’ just doesn’t happen. Even so, I’d perhaps be willing to give some components of it a shot if we were in a different situation, but adding to the deficit in such a manner in the situation we are in is reckless, if not immoral. We can do better. Obviously, there is a lot more to the bill, both good and bad, than listed here. But, I’ll trust you to look those up if you’re interested.

* So, here is my proposal (caveat: I've focused on single payers below, but the concept would be the same for other filings. Also, I don’t have a CBO score and haven’t run the numbers to see exactly how it affects the deficit, so I would need to see how those come out when I have the time, money, and people 😉. ):

THE DAVID K. WILLIAMS PROPOSED TAX PLAN

· Continually increasing tax ‘brackets’

o The highest income in each current bracket would see no change.

o The rates would increase steadily between the current brackets on a percentage of income basis

o Rates would increase from 5% to 40%

o It is very SIMPLE with no large jump in rates

o No one would see a tax increase, with the exception of a mere 0.4% increase for those making over $450,000, and most would see at least a little bit of a reduction. (I could be persuaded to possibly make the top level $500,000 depending on how the deficit numbers work out)

o My proposed rates for single filers can be found below

· Reduce corporate tax rates from 35% to 30%

o This would give a bump to corporations to help further stimulate growth

o This is much more realistic than the reduction to 20% that has been proposed

· Keep the deductions common among the lower and middle classes and which help important segments of society.

· Allow a $4,000 personal exemption (down slightly from $4,050) with a slight increase in standard deduction to $6,500 (from $6,350).

· Make long term capital gains tax rates 15% up until the top bracket, which would continue to be at 20% (wealthy investors often record little, if any, ‘income’ and thus pay 0% in the current system.)

· Adjust the second-home mortgage interest deduction to debt as high as $250,000 (currently at $1 million)

· Reduce or severely limit other ‘special interest’ deductions such as the Carried Interest Loophole and golf course tax while leaving others, like the estate tax, as is⁵.

o The 0.4% increase on the upper levels along with these changes would help pay for the other tax cuts without hampering any individual’s way of life.

** This plan allows for easy manipulation, as required, due to changes in the economy. Simply adjust the rates evenly either up or down, lower the top rate and adjust the others accordingly, adjust the income levels more fairly or evenly throughout the scale, etc.

*** Much more would obviously go into it, but this would be the general backbone and starting point.

CURRENT LAW COMPARED TO THE HOUSE AND SENATE TAX PLANS:

http://www.businessinsider.com/tax-brackets-2018-trump-tax-plan-chart-house-senate-comparison-2017-11

THE DAVID K. WILLIAMS PROPOSED PLAN

TAX BRACKETS FOR SINGLE FILERS

5%	$ -	$ 1,865	21%	$ 70,321	$ 75,715
6%	$ 1,866	$ 3,730	22%	$ 75,716	$ 81,110
7%	$ 3,731	$ 5,595	23%	$ 81,111	$ 86,505
8%	$ 5,596	$ 7,460	24%	$ 86,506	$ 91,900
9%	$ 7,461	$ 9,325	25%	$ 91,901	$ 125,150
10%	$ 9,326	$ 15,050	26%	$ 125,151	$ 158,400
11%	$ 15,051	$ 20,775	27%	$ 158,401	$ 191,650
12%	$ 20,776	$ 26,500	28%	$ 191,651	$ 236,660
13%	$ 26,501	$ 32,225	29%	$ 236,661	$ 281,670
14%	$ 32,226	$ 37,950	30%	$ 281,671	$ 326,680
15%	$ 37,951	$ 43,345	31%	$ 326,681	$ 371,690
16%	$ 43,346	$ 48,740	32%	$ 371,691	$ 416,700
17%	$ 48,741	$ 54,135	33%	$ 416,701	$ 417,550
18%	$ 54,136	$ 59,530	34%	$ 417,551	$ 418,400
19%	$ 59,531	$ 64,925	35%	$ 418,401	$ 424,720
20%	$ 64,926	$ 70,320	36%	$ 424,721	$ 431,040
			37%	$ 431,041	$ 437,360
			38%	$ 437,361	$ 443,680
			39%	$ 443,681	$ 450,000
			40%	$ 450,001	$ 450,001 +