On Wednesday, April 26, 2017, Treasury Secretary Steven Mnuchin and National Economic Council director Gary Cohn announced President Trump’s latest tax plan that proposes to cut corporate taxes and lower personal tax rates.
For anybody who has ever made money, you know that paying tax on your income is one of your largest ongoing lifetime expenses. A progressive tax system that taxed my income at a Federal + State marginal rate of over 50% during the Obama years was one of the catalysts for negotiating my severance and leaving the workforce for good in 2012. It didn’t feel worthwhile anymore to work 60-70 hours a week and go through so much stress for the privilege of paying the government more than I kept.
What’s even more amazing is that the vast majority of Americans save LESS than their effective tax rate! Can you imagine being taxed at a 20% effective rate when you can only save 6% of your after tax income? No wonder why so many people can’t escape the Matrix. There are government officials who are laughing behind closed doors at the masses for saving so little and paying so much to the government.
Trump’s Tax Plan
The irony of higher taxes is that it has empowered me and numerous other people to question the unhealthy desire for prestige and money and to retire early. Too many people are killing themselves at jobs they don’t like just to be able to tell people they don’t care about how powerful and rich they are.
Hello folks. Nobody cares if you are the Vice President of a fast food chain that helps contribute to the obesity of America. Nobody cares if you are the Head of Growth for a credit card lead generator that enslaves millions of Americans with 15% – 30% revolving lines of credit. Definitely nobody cares if you are the Head Of PR for a company whose founder lies, cheats, and mistreats women.
I can unequivocally say these past five years of not working for Corporate America have been the happiest times of my life. Now I can even join people in voting on legislation to raise taxes on other people without having to pay more taxes myself! I haven’t yet, but how groovy is that?
With the revealing of the Trump tax proposals and their lower tax rates, however, I am fearful of being incentivized to actually find a job again after five years of early retirement!
Unfortunately, President Trump isn’t really cutting income taxes for the majority of people, only the rich. However, another cohort benefiting the most from Trump’s tax proposals is the large and small business owners of America. That’s me: small business owner! And it can be any of you too, if you take my advice.
The Best Parts About Trump’s Tax Plan
While details on Trump’s tax plan are still sparse, based on the White House briefing, in order of awesomeness, here are the best parts:
1) Corporate tax rate of 15%: This is a MASSIVE cut from the current federal statutory rate of 35%. For profitable, publicly traded companies, they will see their retained earnings go up, their P/E valuations go down, and their share prices go up to trade in-line with historical averages. Stock market investors should benefit.
2) Allows pass-through rate for business owners: Instead of self-owned businesses being taxed at the personal income rate, business owners would have incomes from operations taxed at the 15% rate. Therefore, any individual making more than $37,650 in small business pass through income should see a 10% – 24.6% tax break ((39.6% – 25% current personal marginal income tax rate) – 15% proposal)!
3) Eliminate the estate tax: This would eliminate a tax on assets being transferred via a will after someone dies. Currently, any wealth you leave as an individual above $5.49M will get taxed at the highest federal and marginal tax rate. The number is double for married couples.
4) Repeal 3.8% tax on net investment income: With this repeal, no longer do you have to pay a 3.8% tax if you are an individual making over $200,000 or a married couple making over $250,000. I’ve always believed that $200,000 – $250,000 a year in annual household income is the sweet spot for maximum happiness, partly due to additional taxes when incomes breach these levels. Now Americans would be free to earn a little more without having to pay a penalty.
5) Double the standard individual tax deduction: This would allow individual filers to deduct their first $12,700 in income from their taxes and $24,000 (almost double) for joint filers, as opposed to the current $6,350 for individuals and $12,700 for joint filers. This would be a GREAT change for the middle income taxpayers who don’t have itemized deductions greater than the standard deduction amounts.
6) Repeal the alternative minimum tax: Abolishing the AMT would be great for the roughly 5 million tax filers who’ve seen their itemized deductions get eliminated because the government did not include an inflation adjuster when the AMT was first introduced in 1969. Instead of making sure only wealthier earners paid taxes, the AMT unintentionally ensnared millions of ordinary taxpayers.
7) A slight adjustment to individual tax rates: The top federal marginal tax rate would be cut from 39.6% down to 35%, which only helps the 1%. Meanwhile, there would be a 25% and a 10% tax bracket for a total of three federal tax brackets, down from seven brackets. Here’s where people living in expensive cities making roughly $112,500 – $190,150 a year need to pay attention. This is because if you go from paying a 28% marginal federal tax rate to 35%, there’s a chance this actually may be a tax hike.
8) A one-time repatriation tax holiday or cut: There are billions of dollars sitting overseas because companies like Apple don’t want to repatriate the money because the tax level is too high. If the repatriation tax was lowered, the repatriated money could be used to hire more Americans and build more domestic factories. Even if the money is not used to hire more or build more in America, the money will at least go to stock buybacks and dividend payouts, which is good for shareholders.
Start A Business Already!
I must be one lucky son of a gun because when I left my day job in 2012, I saw a gut-busting ~70% decline in my earnings. All I had was about $78,000 in passive income streams and some money coming in from my online media business to keep me afloat in expensive San Francisco. As a result, I was paying a reasonable 15% marginal Federal Tax rate because most of my passive income is shielded or taxed at a favorable rate.
After five years of hard work, without Trump’s tax reform, for 2017 my S-Corp may be potentially paying the top 39.6% marginal federal income tax bracket. If the 15% corporate rate and pass-through gets approved for all small business owners, then I could conceivable earn a $50,000+ tax windfall every year the tax policy is in place!
Being an entrepreneur is already amazing due to the freedom it allows and the satisfaction gained from creating something from nothing. But to now be able to make the same amount as a W2 employee and pay a 10% – 24.6% lower federal income tax rate is freaking AWESOME!
With the increased cash flow, I plan to hire more freelance workers to grow my business. I’ll add some new features to the website, create new products, produce more content, introduce new multi-media content, and attend more events. By plowing back more money into my business, the business should grow even further and help even more people. How great is that?
If you don’t have a business idea, go from being a full-time employee to a contractor who gets hired back by your employer. Incorporate yourself, and voilà! Less taxes and more freedom to work with multiple clients.
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It would be huge to have a reduced business tax rate. I hope the changes go through. Running a business is harder than many people realize. I certainly had no idea until I started working for myself. I remember writing a post several years ago about how I wanted to shut down my business because of taxes, so a rate cut is real music to my ears!
I totally agree. Lowering the tax rate allows more money to flow to people like you who are running businesses and allocated resources wisely and less money to flow to those who do not work.
Wait, the graphic implies the new brackets are 12, 25, and 33, but you’re saying Trump has proposed 10, 25, and 35. Which is correct? Or am I mis-reading it?
Good catch. The graphic was from Trump’s 2016 tax plan proposal while campaigning. I’ve clarified it in the caption. Thanks.
Now he’s proposing 10%, 25%, and 35%, so a 2% increase for the top now from previously, but a 2% cut for the bottom. Sneaky! But seems more possible to get through as a result due to the need to cover government spending.
Great. There are gonna be a WHOLE lot of middle class schmucks in the expensive coastal communities (read: Bay Area) barely making six figures who will now see their tax rate bump up from 28% to 35%.
We are not amused….
Yeah, potentially up to a 7% tax increase, but that won’t happen if the standard deductions double. Therefore, maybe at worst it will only be a 3% to 4% tax increase. Hooray!
IT will be a much larger increase than that because they are also doing away with the ability to deduct state taxes from your federal taxes. Those in places with high state taxes are catching the short end of the stick here.
Agreed. My married filing jointly state tax deduction alone this past year was approaching $20,000, with total itemized deductions around to $25-28,000 after mortgage interest and other deductions.
Sounds like Trump’s tax plan will only help business owners and especially punish those who make good money ($200,000+) but not enough to be truly wealthy.
Dave helping small business owners is a good thing. Business owners with less than 20 employees account for around 85-90% of all jobs in this country. Every politician always talk about “helping” small business but always seem to find more ways to tax them or charge another fee instead. It about time some relief comes to small business. Because you don’t turn into a big business without starting as a small one.
Even as Sam mentioned above this plan would allow him to potentially hire more people to help grow his business. How is that not a win win for everyone?
Keep in mind that is on a fairly small piece of your income – it’s not like your entire income goes up 3-4% – just the marginal piece there – plus your standard deduction will double and part of what you were paying at 28% will be at 25%. The only people who really will end up paying more on personal income taxes are those who itemize a ton – more than double the standard deduction.
Great point Rob. I was about to mention something similar. When I first saw that diagram in the fall, I noticed that it conveniently left out the standard deduction increase. If you’re single, making over $150,000 and claiming a lot of itemized deductions, you may be in trouble, but I don’t think most people will see a “yuge” change. Actually, my joint income is only around $70,000, so if this goes through, my family stands to benefit greatly. Not sure if it’s the right solution for the country, but if any changes are made I suppose we’ll find out. Also, the big increase in the standard deduction will mean a lot of people won’t have to itemize anymore.
This wasn’t in Sam’s post but apparently Mnuchkin said they were doing away with all itemized decutions as well, besides the charitable and mortgage and one other.
He also mentioned about moving to territorial taxation. No way!
Yet, somehow I doubt Congress is gonna act on anything “radical”. Worse, they have to keep everything revenue neutral to use the Senate budget reconciliation process to pass anything with 51 votes along party lines. Since the Democrats are now the “Party of No” for the next four years, no help will be coming from them to get to 60 votes for any legislative spending increases.
But, don’t most people living in costal city’s typically support the Democrats who want higher taxes and need higher taxes? I really doubt Hillary or Bernie would have lowered taxes or tried to. You can’t have free college, illegal immigration support, and all the social programs without taxing the rich?
Its just identity-group politics. When the pedal gets put to the metal as with losing the state/sales tax deduction, they’re just like any other taxpayer and will protest. In reality, 80% of all federal income tax revenues are paid by those making over $100K a year. Those rich taxpayers already pay for literally everything.
Maybe there is wriggle room at the state income tax level, but I’m not going there.
I live in a coastal city suburb…lots of Republicans here. On the whole, we don’t want free college, illegal immigration support or more big government. I love the idea of not having to spend so much time tracking deductions!
No, I don’t support the welfare state mentality of my elected coastal state democrats. I know it’s easy to say “because we live in blue states, we deserve higher taxes”. I simply can’t pick up and move to Texas because the IRS tax code rewards low tax states vs. higher ones.
Thanks for the timely and insightful post. I am curious to see what impact the elimination of deductions for state and local tax payments has. Do you think this could create some housing softness for markets like NY, NJ, CA etc?
The proposed elimination of state/local taxes + a higher marginal tax rate for me. THANKS TRUMP.
Seriously my Property tax + local city and state income tax basically equal the new double standard deduction for a single person. My mortgage interest and charitable donations would likely only get me up to that standard deduction so I’d be out almost $12,000 worth of deductions again at a higher marginal tax rate. I can’t wait.
The higher marginal rate is only a sliver of your total taxes. There are also slivers that will decline (eg: most of your 28% is now 25%, and your 39% is now 33%).
Even as someone who benefits from mortgage interest deductions, I don’t think we should ever encourage debt at the government level and would be glad if that were eliminated. The advantage of removing state/local from deductions is hopefully it would put pressure at the local level to lower those rates.
Agree. I’m in an absolute rage over this.
The removal of the state & local tax deduction is a huge deal.
State and local tax deductions amount to a much larger total than the mortgage interest deduction.
The administration says that they kept the most popular deductions (mortgage and donation)… we’ll have to wait and see if this holds. I can’t imagine that people will be content with losing their largest (statistical) deduction.
On the positive side, the increased standard deduction may make this moot for lower incomes. It definitely strengthens the case for living in a no tax / low property tax location.
We’ll see how the plan morphs over time. Don’t get hooked on that 15% rate just yet!
I’m a fan of the tax breaks from a personal and business standpoint, but I’m not sure it will lead to increased business starts and more jobs. Maybe I don’t know enough people, but I’ve yet to meet someone that says they would start a business only if tax rates were lower.
The main impact is businesses will make more money and share prices will go up. I like that for selfish reasons but don’t know that it will spur economic growth. Time will tell.
Guess what? You met one right here. Part of start a business for me was due to the tax advantages over earning W2 income. With this potential additional tax down to 15%, that’s a HUGE incentive for people to incorporate themselves, take some risks, start a side hustle, and do something entrepreneurial.
I hope you’re right, and I agree it makes sense in theory. But take a state like Kansas who doesn’t tax income on LLC or LLP. It hasn’t had the impact our governor hoped for. Perhaps the larger decrease on the federal side will have a bigger impact on encouraging business growth. It won’t for my company (lower taxes just means our retained earnings goes up) and many others I’ve talked to, but maybe I’m missing all the people like you :)
I suspect the biggest allure of lowering the official corporate tax rate will be to attract foreign mega-corporations. They have the economies of scale where small marginal income tax decreases will make a bottom-line difference. They would be good for certain kinds of jobs, i.e. lower or lower middle class.
If you look at Canada and Britain’s experience, we won’t lose tax revenue, but I’m not exactly sure we’ll have more business startups or a better economy. Overregulation and economic protectionism at all levels is a much bigger obstacle than tax rates. To be fair, most of that is concentrated at old school, tangible industries. If you’ve got a virtual business like Sam or something similar, there’s very little standing in your way.
Definitely agree with the over regulation being a bigger obstacle than taxes.
It will be balanced out with people like me who will be investing less in their own businesses in the next 4 years, because we would prefer to maximize income in years with low-tax rates and minimize income in years with high-tax rates! The easiest way to do this is to spend/invest more in your businesses when rates are high.
I remember Bush Jr. trying to get traction on lowering the pass-through rate, but it didn’t happen. That will be far more significant than a reduced corporate tax rate as corporate taxes contribute relatively little to overall tax revenues. Also, there’s still the same problem of double or triple taxes on the same income. Why not just go all the way and eliminate the corporate tax alltogether? That would match the promised hyperbole.
Also, I completely fail to understand the logic of the marginal tax rate increases. It’s as if Trump wanted to prove the fear-mongering of the Democrats. He literally is raising taxes on the poorest poor. I’d be surprised if Congress passes it like that since just about anyone else could design it better.
I’m not so sure it does change the poor position that much. With the higher deduction those making under 12k essentially pay 0. Probably the biggest loser here is a itemizer who is poor. I wonder how common itemization truly is at low income levels.
Good point — I didn’t see that about the standard deduction doubling which would negate most of the increase. But, yeah, getting to the point of itemizing is very difficult unless you have a lot of expenses based off of a high income, so essentially only the “rich” do it.
These are just proposals… no guarantee that Congress will not water it down. Usually what happens (historically) is they do get watered down which is a larger part of the reason we are so globally uncompetitive taxation wise. So once again, Trump doesn’t walk the talk. If he’s such an “incredible negotiatior”, he’s not setting the bar high at all. Where’s the territorial taxation? Where’s the eliminate of the corporate tax or the double/triple taxation? (double makes the proposed 15% corporate tax rate increase to 28% with a 15% dividend rate added and prejudices itself against pass-through entities who get 15%). I think the guy relies way too much on advisors which involves a lot of liberal creep, i.e. Munchkin, Cohn, Kushner, Ivanka, etc. (who are all Democrats).
Hopefully Congressional Republicans will seize their chance. They don’t get that chance very often and they almost always screw it up. Maybe this time we (the voters) should actually send our reps advice on how to enhance the proposals so they’re not so darn compromising.
Help me to better understand your point 2. I see that single filers making $37,650 get taxed at 15 percent (using old 2016 tax rates). Married filers however stay in that bracket until they exceed $75,300 (again, using 2016 tax rates). My husband is a single member LLC earning about $120K. I am partner at a law firm (an LLP) earning about $213K. We are both considered self-employed for tax purposes and I believe both our entities are pass through entities.I am trying to understand (presuming old tax rates which I realize may change here) how point number 2 above would affect us if it came to fruition. Thoughts? If it means that both our incomes will be taxed at a new lower rate, I will have to pinch myself.
Pinch each others bums because under the new tax proposal, your pass through self-employed income (S-Corp or LLC) over $75,300 will be taxed at 15%!
Whatcha gonna do with all your new found cash money?
I have a partnership structure into which my investment income can pass through. Hopefully that will be a benefit since my current upper bracket is in the 39% as the short term investment return is taxed as income. The biggest losers of the proposed scheme are those high-income W2 earners in high tax states such as California, New York, etc., as there is a proposed repeal of state and local income tax deduction. That is a bummer.
Have you looked into electing trader status?
I’m not sure Republicans are gonna shed too many tears about the high-income Democrats in the high tax states losing their state and local income tax deductions. But I bet you can count on the Democrats to be hypocrites on that one!
I meet the trader status per the IRS definition and I use a partnership as the business entity for the investment/trading instead of LLC or inc. The reason is California taxes the profits from a LLC or inc. but not partnership, according to my CPA. Like what Sam has blogged before, California state income tax, the highest in the country, is a killer.
It is way too earlier to tell in what form the proposed tax plan will look like after the Congress finally passes the bill.
Just a note that not everyone living in high tax states such as California is a Democrat. Unfortunately, I am one of those that loses with this tax proposal, which is a bummer. But, I choose to live in CA, so such as life.
Right there with you, Danielle. Frugal Independent here, who grows more disillusioned every day with the lunacy of the idiots in Sacramento (and locally). This is NOT the California I grew up in! And yet, we pay, and pay, and pay some more. Grrr.
The CA tax is painful enough for me that I will move out of CA to a state with no income tax soon after I retire. Love the CA weather but hate the political climate and tax system.
Wow – I went back and found an article on Bloomberg today that mentions the pass-through tax rate being lowered potentially to 15%. Thank you for highlighting this in your blog! You have gotten my hopes up and I am already doing the compound interest calculations on the extra amount we could be redirecting from taxes to retirement savings. Fingers crossed!
FS – Do all small businesses qualify for this? I’m a “C” corporation, for example. If not, would I need to become an “S” and what would that take? Shareholder BS, etc.?
Holy Trumpburgers! Those tax breaks look amazing. It’s almost good enough for me to move down to California just to start a business. :) I look forward to seeing increased innovation, higher personal savings, and more financial freedom in the U.S. For FS’s future multi-media content plans, will we be seeing some YouTube videos from you?
Absolutely in favor of decreasing taxes. Especially on small business. It will certainly lead to existing businesses expanding and encouraging the creation of new ones.
Will there be enough job creation to make up the difference from the tax cuts? Any chance it could help us stop going into debt a trillion dollars per year? I hope it gets passed and we get to find out.
While I agree that his tax proposal has some good points to it as Sam points out I am highly skeptical that it will be revenue neutral for the deficit. I’d rather not trade great benefits for us now for more serious problems later.
No need to worry — a lower corporate tax rate won’t effect revenues (either way) as Canada and Britain’s recent experience shows, so don’t fall for that Democrat talking point. Besides, without a deficit there would be no new Treasury securities issued that individuals or institutions could buy and use for safe savings.
I’m sorry, probably because I’m tired. Can you explain #2
2) Allows pass-through rate for business owners: Instead of self-owned businesses being taxed at the personal income rate, business owners would have incomes from operations taxed at the 15% rate. Therefore, anybody making more than $37,650 in small business pass through income should see a 10% – 24.6% tax break!
Does anyone know if this tax plan will remain progressive? i.e. is this still true? “as income rises, increasingly higher taxes are imposed. But those in the highest bracket dont pay the highest rate on all their income. For example, in 2016, single individuals pay 39.6% only on income above $415,050 (above $466,950 for married filing jointly); the lower tax rates are levied at the income brackets below that amount…”
so if you make $120,000, will all $120K be taxed at 35% or will it be $112,000 taxed at 25% and then $8,000 taxed at 35%? Thanks.
This is not a flat or FairTax; it’s still progressive.
Lowering taxes is great if they can also cut spending. We pay so damn much just to servicing our country’s debt it is crazy. As long as they continue to not tax dividends and capital gains for the 15% bracket I’ll be happy. And eliminate the worthless ACA penalty tax. And keep the FEIE exemption as well. Doubling the standard deduction will be great for tax gain harvesting and/or converting more retirement funds into tax-free Roth funds.
I do love the idea of this happening, but still am hesitant to think it will actually pass in this form. I feel like congress will get their hands on it and change it quite a bit.
Also, do you feel that any tax plan needs to be revenue neutral? Many economist think that even with aggressive growth it will not help the deficit and could actually balloon it eve more than it already is. Do you have any worry that it is only a matter of ‘when’ and not ‘if’ the US defaults on its debt?
Just curious as to your thoughts on this, ultimately I am for the tax breaks and trying to encourage savings and investment in the country. In the end, they could just go after IRAs if they need to ;)
Thanks for sharing this topic timely. I have a friend in healthcare consulting who decided to receive W2 over 1099 even if I told him otherwise. I just emailed him the link of this post and will tell him again to form a LLC or S Corp because he is currently taxed at 33%. He would be so much happy with 15%!!
He could also claim his business expense for a dollar to dollar deduction. If he were to claim that as unreimbursed employee expense, it will be subjected to the floor of his 2% AGI.
I think it’s a good start. Obviously without hard numbers for income cutoffs it’s hard to see how much I’ll benefit but it will be nice.
In terms of being revenue neutral the same applies. The question will be how much the elimination of the deduction for state/local tax will add to the tax rolls. That and expansion of income ranges in the lower brackets may help get it somewhat close. The key will be if the congress plan includes a BAT which could conceivably close the gap (mathematically but not in reality) to get this passed permenantly.
Overall it’s a good plan for business. An okay to really good plan for me depending on the income range for the brackets.
I have to stop caring about the deficit/debt. It’s going up. Period and short of flat out catastrophe nobody is going to cut spending where it’s actually needed. Given that…I’ll have to get mine while the gettings good. When taxes go up in the future I can make myself income poor. Not a problem.
And to those in NY and CA complaining about not being able to deduct state/local tax…we just want you to pay your fair share. C’mon now…pay your fair share.
I don’t live in NY, CA or NJ
lol that’s laughable. CA, NY, NJ, WA, MA are paying more than their fair share in taxes, they are net losers subsidizing the welfare of govt spending in “low property tax” and “low income tax” dumps like TX , FL, and a swathe of the south and Midwest. People move to these places not realizing they will save $2,000 in taxes and lose thousands more in reduced services, reduced wages, educational opportunities etc. I would rather we separate ourselves from these dumps, but they dictate the politics and pork barrel spending of our country unfortunately. Enjoy your time in the sun driving our country into the ground as you did under the last genius leader of yours, the esteemed President Dubya.
I try to enjoy my time no matter who the president is.
In reality those in CA, NY, NJ, WA, MA are able to pay more taxes because they benefit from the contributions of the rest of the nation. They think they created an economic island of success but in reality they didn’t build that! The country allowed them to succeed. They just need to stop being so selfish and spread the wealth around. It really irks me how greedy people can be. Maybe reflect on that and you to can enjoy your time regardless of who the president is!
Adam,
Not to be political but you can save a hell of a lot more than $2000 living Texas or Florida. Also the services here are pretty darn good. Don’t let you polticsl view cloud your judgement of states you have never visited or lived in. At some point when is enough, enough. Why does a successful guy or girl living in CA need to pay such absurd tax rates. And someone who doesn’t work or make much money gets to profit from their hard work or success? What is that number for you. Does the wealthy single computer programmer get his fair share if his crazy tax rate? He doesn’t need the healthcare, failing schools for his kids, public transportation, the list goes on and on.
Are you ok sponsoring families in the state you live in?
The increase in the standard deduction, I fear, would hit charities quite hard. The threshold to itemize would be much higher (harder to realize the tax benefits of giving) and the average value of itemizing would decrease substantially for those who itemize. I think this would have a significant dampening effect on charitable giving. As a board member of a charity that depends heavily on individual contributions to carry out its mission, this worries me well beyond any tax savings I may personally gain.
Really, you figure the only reason people practice charity is for the tax deduction that most can’t take anyway? Come on, we’re the most charitable nation in the world! That isn’t going to change. If you’re co-dependent on relatively few high income earners who manage to itemize, that may be the real problem. Aren’t there crowdfunding sites for charity that you could use?
Not at all – however, it is very much a factor in how much people are able and willing to give. If it only costs 70 cents to give a dollar, then you can “afford” to give 43% more. Also, consider that many people give end-of-the-year donations as a form of tax-planning. I’m not saying that donations would drop off a cliff, but even if it resulted in a 10% drop – and it easily could – that is a couple million dollars of unfunded projects.
It might effect my giving. I will still give but I admit to giving more because I get “credit” for it.
Trump proving why he’s the king of debt and king of bankruptcy with this tax plan. Math is math :)
Reading through the comments, a lot of people just being selfish here. Bill Clinton raised taxes and during that time we saw the largest economic expansion that I’ve seen during my lifetime. When he raised taxes they all said that he would kill jobs and the opposite occurred. If lower taxes is the answer then the Clinton years wouldn’t be possible.
Everyone’s who makes money already is pretty excited about the new tax plan but I’m pretty fearful. Low taxes, war mongering and increased spending isn’t a good combination mathematically. The good news though is that it took Reagan 5 years to get a tax reform plan approved. Trump thinks he’ll get it approved this year but we will see.
We’re all selfish, even when being altruistic, so that isn’t a valid criticism. It’s only human. That’s why we’ve designed a system (Capitalism) to accept that as reality instead of fighting it (Communism).
However, the truth about marginal income tax rates is it doesn’t really affect the percentage of GDP that goes towards tax revenues. It stays essentially flat around 20% over decades no matter if the top marginal income tax rate is 90% or 39%. So while you may have short-term market effects like the Trump Rally or the Clinton Rally (he did lower taxes first), it’s just not significant in the long-term.
But I agree with you that Republicans never walk the talk when it comes to decreasing government spending or abolishing crony agencies. I’ve been hearing it all the way back to Barry Goldwater. It’s just group-identity politics. Only a complete crash and burn will ever reset anything.
Yes, to consider ones own self without considering the greater impact is selfish. Forget Percentage of GDP, Clinton took in more tax revenue than he spent in 98, 99, 00. He doubled tax revenue from the time he came into office to the time he left or by “your” measure he increased tax revenue as a percentage of GDP every year he was in office. It’s bad news if you collectively add up all the things that Trump is proposing (wall, increased military spending, corp tax cut, etc). In regards to your complete crash and burn and reset comment, personally I think that’s Trumps long term goal (term 2 maybe, if he gets it). That’s actually Trumps “real” area of expertise therefore he would be the perfect person to attempt it. That’s not needed though if presidents learned to make surplus the norm instead of the exception.
You’re being too politically biased. Clinton had a fake Internet bubble economy for that temporary tax revenue increase from all of the capital gains taxes. It’s not like he did anything intrinsically-beneficial other than compromising with the Republican-controlled Congress. What’s really bad is when there is no gridlock to keep them all in check from unilaterally running wholesale with their grand utopian social engineering schemes all at taxpayer expense. Upfront Democrats are just as bad as hypocritical Republicans when it comes to tax and spending, so don’t kid yourself.
We can’t fix the problem with the lack of a budget surplus without reforming the monetary system and banning Congress from ever borrowing again. Until we get to that point, there is other fish to fry lower down on the totem pole to bolster the case first. There’s far more at fault with DC than just deficit spending; there’s careerists, crony capitalism, unfair voting, imcumbent gerrymandering, corrupt lobbying, etc.
The very “first” thing that Clinton did was roll back the Reagan tax cuts and increased corporate taxes to the “highest” in the world. No one can still explain to me how under those conditions we saw the greatest economic growth in modern times occur. That should not be possible based on what we are being told. I guarantee if Clinton came into office and decreased the corporate tax rate to 15 percent there would be no dot com boom, no surplus. I’m 99 percent certain of that, policy matters and promoting coal ain’t it. Agreed, in regards to Clinton congress. Let’s hope Trumps Congress is so smart and in the end something decent comes out of it.
Well, that’s because Laffer Curve groupies believe that tax cuts are always a black vs white outcome just based on limited experience of doing so in the 1920’s, 1960’s and 1980’s which completely ignores the context of the underlying economic situation of the time. Since the tax increases first passed in 1993, it was fortunately near the end of the business cycle that had been stagnant since the 1987 stock market crash as well as the oil bust/real estate recession of the early 90’s. So, between Clinton’s tax increases and the later spending cuts passed by the Republicans in 1997 (they also reduced the capital gains tax rate and instituted the tax exemption for selling your home), tada, you wind up with a budget surplus. But it’s easy to conflate both political acts as being directly responsible instead of the underlying economic growth (mostly faux but I’m sure the Treasury didn’t mind) which had bottomed in April 1994 and boomed until 2000.
Needless to say, I don’t think we’ve improved politically in any rational aspect since that time. Arguably it’s worse now with so many centrists gone that were willing to compromise across party lines. 80% of Democrats backed those tax cuts in 1997. I’d be shocked if that happened nowadays.
Continuing this discussion further (mostly cause it’s interesting), Bush Jr comes along and then basically says (in so many words), this surplus isn’t ours, it belongs to the American people (code language for, let me give this back to the rich). He then cuts taxes. It’s so stupid, in regards to presidents dealing in constant deficit. Policy matters, there was no need to do that. Like, I mentioned earlier deficit should be the exception not the norm. It’s a constant yoyo back to stupidity. :)
Amen. Actually quite surprised by the responses to this post. Everyone is salivating thinking about lower outright tax rates – but no talk about the deductions that are going away (state and local property taxes no more, seriously?) and the combined increase in military spending, ridiculous wall, who knows what else…along with all the budget cuts being thrown at us from education to scientific research. Yeah we MIGHT have a few extra dollars in our individual pockets depending on how the deductions get worked out, but how will school systems, infrastructure, and other publicly funded services we all take for granted survive? Not to mention the growth targets we’d need to hit for federal tax revenue to not fall off a cliff are laughably optimistic. Quite disappointed with Sam on this post too.
https://www.gradingstates.org/the-problem-with-tax-cutting-as-economic-policy/
Although it’s true that many business owners will get a tax cut and this might spur investment, but most middle class/middle-income people always get the short end of the stick. You really have to look out for yourself and your family in this world because no government tax policy is going to cut it.
I’m not very well known with the tax system in the US (coming from the Netherlands). And we are used to a whole different government system (so I might be biased). But as well as a lot of upsides, I’ve come across a lot of articles with some skeptical downsides as well.
With lowering taxes, the money has to come from somewhere else to fill up the hole in government earnings. Now it’s being proposed as that will be the case due to future economic growth, which you can never really predict. I’m really interested in how this will play out though.
I’ve read that one such proposal (by Trump) is to make 401(k) contributions post-tax rather than pre-tax. The money has to come from somewhere ….
It will definitely be interesting to see what actually gets passed. I’m all for tax-simplification… and lower business taxes. The rates I pay as a self-employed person are insane.
15% on pass through income would be a windfall but I am guessing it will be offset by other deduction eliminations. I am aware of the proposed increase of the standard deduction but most business owners deduct healthcare, self employment tax, autos, etc, real estate depreciation etc. It is hard to believe my annual tax bill will be cut in half. However – if this is the “master negotiator” opening bid, and he thinks he can maybe settle on 22% It would still be great. People don’t realize how many small businesses pay taxes on pass through income and how detrimental that is when there is volatility of income, estimated taxes, and planning.
I’m co owner of a $20 million business pass through business that generates about $2.5 million of income. Given my residence in a high tax state, my total blended tax rate is 52%. It galls me hat late global businesses can play games with business segment accounting and not dramatically reduce their taxes while the small guys get punished tax wise. We pay industry leading wages across all positions in our business as people are are competitive advantage for us. If our rates are lowered we will continue to invest in our rmployees with better training and compensation and grow more aggressively with the freed up cash that would have just been sent to government. For all the nay sayers out there that don’t think the dramatic lowering of taxes will spur this economy, they don’t understand the strong entrepreneurial culture of this country’s small business.
I am always in favor of lower taxes! Thanks for laying this out, I currently don’t have the time to get to this level of detail. Since you have researched this fairly deeply, where does the balance for the lesser taxes rates come from? Increased business, thus increased taxes? Cleanup of government expenditures.
A few years ago, thanks to blogs like this one, I have really cleaned up my finances. I don’t see why the government shouldn’t take a lot of the same measures.
The idea is to grow our way into generating more revenue than we cut in taxes. Jury is out, but I for one, will be using most of my windfall to grow my business and hire more freelancers. I think many other businesses like mine will too, accelerating the migration out of coastal cities and into lower cost areas of the country.
That’s called “dynamic scoring” in budget projections. The problem is the Congressional Budget Office is biased and can’t forecast worth a hill o’ beans (it is a government agency, after all), so I would look for private sector sources for the proposed economic effects.
Still, we need a ridiculously high level of GDP growth (4%+) to statically deal with the outsanding liabilities and unfortunately at this juncture in the economic cycle, we are not ideally set up in terms of population and productivity growth to pull it off. What we really need is to at least act as the best tax haven for the rest of the world to pull in those trickle down financial services effects and act as a permanent plateau. That is in all probability likely going to happen with a 15% corporate tax rate as only Ireland is lower at 12.5%. We’re still renowned for the “rule of law” even if it’s gotten incrementally worse over the last 17 years (we’re no longer in the top [15] least corrupt countries).
So how will all this lost revenue be replaced??? I know we all hate paying taxes, but they do fund a higher quality of life for us. We all want our cake and to eat it too. Where do you “find” trillions of dollars of lost tax revenue over the next decade?
Not that I think his tax plan will pass as presented, but the way it reads I don’t support it at all.
Sure the 15% pass through for business owner will be great for small business owners, but the by product of that means any high income earners can essentially become a contractor and take advantage of it 15% instead of paying the higher bracket. In another words, no significant changes to middle class tax rate but opens the door for all of the high income earners to get away from paying taxes in the higher bracket by creating loop-hole of being self employed.
Why would a CEO pay the highest bracket, when he or she can arrange themselves to be a contractor instead to pay 15%. This tax plan essentially gets rid of the progressive nature of income tax.
Why is this good for just high income earners though?
The threshold is $37,650. If you are making over $37,650 as an individual wage earner, you can also turn into a contractor, incorporate, and pay the 15% proposed business tax instead of the 25% tax rate up to $91,100 in income currently.
Related: Abolish Welfare Mentality: You Have More Power Than You Think
Plenty of reason why it is only good for high income earners. To start,
Incorporating and being a contractor also come with additional costs, in addition to due to missing out on the benefits for full time employees. So I’d assuming the actual break even point is higher than $37,650 in terms of income.
Then there is the fact that pass through at 15% would more or less eliminates the progressive system of income tax all together, so right out of the gate that would be much more beneficial to those who are making more money than those who make less. If the high income earners saves 25% in taxes and those making between $37,650 and $91,100 saves 10%, comparatively speaking those who are saving less are going to be at a disadvantage. If everyone becomes a millionaire, no one is actually getting ahead (except for higher income earners saving more in taxes).
Then there’s the fact that employees in lower wage positions have less leverage to negotiate with employers to switch to a contractor role, so the opportunity may not be as readily available.
The 15% pass through definitely encourages people to become business owners and that’s a good thing for people to take charge of their own destiny, but I am not sure if repercussions are well thought out because this sounds more like a loophole than a tax plan.
This is huge. There are a ton of changes in here. I’m going to have to transition to S corp if this goes through. I’m sure there will be a lot of revisions.
I don’t know if this is a good time for this kind of changes, though. If we get a recession, debt would explode with lower tax.
Yipee! Trump offers a free lunch today for no food tomorrow. It’s called increasing the deficit. Hurts your kids and grandkids generation.
The idea that you can cut 5 trillion in taxes without proposing spending cuts and growth will fully make up for it is ludicrous (and yes there will be some additional growth, but not nearly 5 trillion worth)
Also of note is the tax cut is mostly for business owners not individuals when you factor in removing deductions.
Who doesnt like a free lunch? Rich people love the tax cut, businesses love the tax cut, and the less well off American public gets larged duped into thinking this is a good thing when it is really about businesses and the rich having more money and future generations paying for it.
…btw i would personally benefit from his proposal, but i dont think it is fair and is why i oppose it
But didn’t the “less well of American public” vote for Trump? See the voter demographic maps I put in my heartland investing post. Trump is doing exactly what he said he would do, so I’m not sure how the less wealthy are being duped.
Small businesses are what drive this economy. I’m definitely going to hire more freelancers with any windfall.
Trump is doing exactly what he said he would do???? No.
The “less well of American public” have been voting against their economic interests for decades this is nothing new.
Trump loves the low-information voters who got him elected on the basis of phony culture wars and who he’s hoping will lower his taxes.
What are the things he is not doing well and he promised to do during his campaign? I’m sure there are plenty, but the main goals of tax reform, healthcare reform, and national security or things he’s been pressing on.
Also, why do you assume people are voting against their economic interest? That is irrational and I don’t believe that to be the case.
There’s a very interesting book on this subject: What’s the Matter with Kansas?
https://www.amazon.com/Whats-Matter-Kansas-Conservatives-America/dp/080507774X
“A brilliant analysis-and funny to boot-What’s the Matter with Kansas? is a vivid portrait of an upside-down world where blue-collar patriots recite the Pledge while they strangle their life chances; where small farmers cast their votes for a Wall Street order that will eventually push them off their land; and where a group of frat boys, lawyers, and CEOs has managed to convince the country that it speaks on behalf of the People.”
Sam, take a look at this op ed in the washington post. It basically calls out what you are saying in terms of converting w2 income into busienss income. It also cites what happened when kansas tried this (growth did not materialize, and huge revenue loss caused credit downgrades)
Bottom line is someone has to pay for this massive proposed tax cut. Based on how it is structured it will either be future generations or the less well off in current generation. I am not ok asking either to pay for a tax benefit for myself or other relatively well off people.
https://www.washingtonpost.com/opinions/the-dumbest-part-of-trumps-dumb-tax-plan/2017/04/27/c621d2ac-2b7f-11e7-a616-d7c8a68c1a66_story.html?utm_term=.34ad3021caf8
LOL, don’t be such a doom porner. :) Business is what employs the “less well off American public”. They’re overburdened with regulations and to a lesser extent, taxes. If you remove their burdens, what do you think will happen?
It’s really not hard to fix the yearly deficit… just a little less yearly spending and it would be gone in 10 years. But like most Americans, you don’t understand that we have a debt-based monetary system that relies on a continual Congressional spending deficit for Treasury securities to be issued into the private marketplace that then uses it as a safe savings vehicle (both individuals and banks). The only way to change that operational reality is through major monetary reform which we haven’t seen since Bretton Woods in 1944. It’s just not time for that yet (and if we’re really lucky, cryptocurrencies will circumvent the whole problem alltogether).
As far as Trump’s campaign promises go, hes reneged on almost two handfuls already, so track them at this site:
Yay! America can become the next Kansas now. I love trillion dollar budget deficits so that rich people can pay slightly less in taxes.
Luckily this one-page “tax plan” fever dream of Goldman supply-siders has less than 0% chance of actually passing. Where are the votes in the Senate?
Those Goldman “supply-siders” are all Democrats. So that’s not a valid criticism. You sound like you’re fear-mongering or regurgitating talking points. Try some critical analysis for a change.
And BTW, states don’t have a central bank willing to finance deficit spending as the Treasury does, so its a different operational reality for states vs the Feds. Deficits do matter there. But Republicans don’t understand that any more than Democrats do.
I would love to see how the CBO scores this “plan.” Would you agree that it’s pretty hard to create some in-depth criticism of a one-page bullet pointed piece of paper which borrows heavily on failed Kansas experiments? I think a college kid with a 5 hour deadline could come up with something more in-depth.
Who knew tax reform could be so complicated?
Comments per Alan Cole, one of the Tax Foundation’s staff economists on the new Trump proposal.
“Pass-through taxes are decently well-structured as they are, and it’s probably best to leave them alone,” Cole said. He told me that, according to the foundation’s model, it would add about 0.12 percent to the country’s annual growth rate, but again, at a cost of about $1.5 trillion. “As far as tax reform trades go, really? Is this the one that you want?”
Assuming he was referring their Taxes and Growth model, it only assumes the impact of taxes primarily on cost of labor and cost of capital. Expecting lower marginal tax rates to affect those cost inputs instead of overregulation and interest rates almost seems like apples vs oranges. This is why I don’t expect much from tax reform alone at this juncture — the vast majority of Americans are not entrepreneurs and interest has been decreasing for decades. We’re just not in the same situation that we were in the 1960’s or 1980’s the last time we had major tax reform nor are we at the trough of an economic expansion.
Yet, if we don’t engage in structural tax reform because we are more worried about the short-term costs than the long-term costs of not attracting and generating more innovation and productivity improvements to society, what exactly are we going to do about the perpetually-growing liabilities? So far we’ve been doing nothing at all and kicking the can down the road for decades. The deficit is easy enough to eliminate; but only sustained economic growth can provide the tax revenues to deal with those liabilities without turning into overindebted Japan or reneging on benefit promises the rage-inducing way.
We need to be careful to not get overly caught up in theoretical models that can never ever model every aspect of reality and human behavior. Anyone that tells you otherwise is lying.
I keep seeing people commenting that this will increase the deficit, and asking “where are going to get back all this lost revenue?”
Shouldn’t we ALL be in favor of lower taxes, and instead of worrying about where the money will come from…worry about cutting spending?
Austin, it’s easy to talk about “cutting spending” in generalities but where do the actual cuts come from?
Let’s not forget that Trump was elected under the premise that he would build a border wall ($21-70 billion), invest $1 trillion into infastructure, keep the key provisions of Obamacare (insurance for everyone, no cuts to Medicaid, no one will be made worse off financially), and increase defense spending by $54 billion a year. So where are the cuts coming from? If anything, I see budget increases.
There is waste and corruption in government no doubt as in any large scale enterprise but I believe government has a vital role to play that cannot be filled in the private sector in: 1) ensuring the availability of health-care for all (there is no economic or moral reason to have health care tied to employment), 2) maintaining a viable infastructure for commerce, 3) protecting our environment, and 4) ensuring the long-term health of social security so that the majority of the population who has not adequately saved for retirement is not destitute when they can no longer work. These things all cost money and are all important to the long-term survival of our nation. To these we should all be happy to pay taxes (while maintaining a watch-dog eye to ensure that waste and corruption does not take place).
The cuts will have to come in healthcare and social security. Won’t happen for political reasons.
Since those are going down anyway you might as well keep as much of your own money so you and yours are taken care of when cuts are forced by financial reality.
If we force the government to spend within their means, how do we pay janitors and elevator technicians $250,000 a year?
Great idea about being a contractor. I have a friend who did this ,quit his job in 1998 and just became a contractor to the same business owner. He loves raising his rate as well as writing off expenses he couldn’t otherwise deduct as an employee, plus the massive increase in deductions he can get from his solo 401k as opposed to an employer 401k.
I really like the idea of the pass thru income. As you stated, that is a huge benefit for small business owners. As my blog continues to grow and get more readers, the income will also go up and this will benefit me greatly.
Great post! Do you think, with the proposed tax changes, people should reassess whether Roth contributions make more sense given the lower tax rates? Our political system tends to be pretty cyclical, so even if the tax changes pass, if/when Democrats take control in the future, I’d expect taxes to go up (eventually) in the future. But, who knows? Maybe the tax cuts will be here to stay for good.
Are you making any changes to your stance on Roth IRAs? I completely agree with your previous assessments on the issue, but want to see if this changes anything for you.
Most working class people will not see an income tax decline whatsoever. Only really folks in the 39.6% federal income tax bracket to 35%. As such, I would still not contribute to a Roth IRA and pay taxes up front.
There are so many legal ways to pay less taxes. I’d incorporate, contribute $54,000 pre-tax to a Solo 401k a year and pay 15% corporate tax instead.
Never give up!
Doing my quick back of the envelope, assuming that the income brackets remain the same as the original proposal and that a taxpayer only takes the state tax deduction, it looks like the break even in CA to the current tax regime is around $375K of income. After that point, it is actually a TAX HIKE! Lower than $375K higher standard deduction ($12.7K to $24K) protects you from not being able to deduct your state taxes.
Given that this is basically just a massive wealth transfer from high tax states to low tax states, I just don’t see how it can go through politically. I’d think the SALT deduction is even harder to pass than mortgage deductibility.
Hi Jon,
At the $375K income level, there’s AMT and because state taxes are an addback item, the state tax deduction wouldn’t change your Federal taxes.
Great coverage Sam. This is a win for the American people.
Some argue that this helps lower ‘Big Business’ taxes.
Honestly, this will massively help the ‘little guy’ small business, so I don’t care about that. We need more small businesses to thrive so that so many of us don’t need to sell ourselves to a 9-5 job.
Thanks!
Anything that lowers overall tax and compliance burden on those that produce jobs and drive the economy is good – and it’s also good when the middle class has jobs. Which, those that produce jobs generally make – a virtuous circle.
And, at some point there is cake.
Let’s go!
Trump’s tax plan, I must say, is the best thing since sliced bread. IF… business taxes are reduced to a flat rate of 15% for ALL businesses (as Trump claims it would), this will be a huge stimulus to the economy. On a more micro side, this is a great chance for someone to increase their income and reduce their effective tax rate.
If you want to build wealth, a simple formula is to increase your income without increasing your expenses. Start a home based business that you can supplement your income with. If you are only paying 15% tax on the income you generate from your business (while you are paying 25-39.5% on your earned income), your overall effective tax rate on your total income will become less than what you were previously paying on your previous income before you started the business. Again… increase your income by starting a business you can operate in addition to your current job, keep your expenses low, and invest the additional cash flow. This is how you get your ball rolling, and Trump is offering a great tax incentive to do this.
From a macro standpoint, Trump’s business tax cut plan offers and amazing opportunity for ANYONE… including the rich, middle class and even the poor.
What this means for the rich: They will start more businesses, invest more in their current businesses, higher more people, make more money and pay less taxes. This will be major boost to the economy.
What this means for the middle class: This tax break will be a great incentive for people to start their own home based/side business. This will bring in more income to middle class households, increase consumer spending etc… this will also boost the economy.
What this means for the poor: More jobs will be available from the new businesses that were started. More workers means more people paying taxes. In theory, a business tax cut would eventually increase overall tax revenue from more businesses and more jobs springing up.
We haven’t even mentioned the personal income tax bracket changes and tax code simplification that would come along with the plan either. Personally, my income taxes under the new plan would be reduced significantly.
Rest assured, the final version will not have a 15% tax rate on passive income for small businesses based on these replies alone. Keep in mind that all profitable business income gets taxed and the after tax income becomes capital or equity on a balance sheet. Any owner can take tax free distributions on their capital as long as they don’t exceed that capital balance.
The business owner should not pay 15% while his employees could be paying 25-28%. If this passes, I will go out and buy any franchise and pay myself nothing to expose my entire profit to 15%. This comes under the heading of “Too good to be true”.
“If this passes, I will go out and buy any franchise and pay myself nothing to expose my entire profit to 15%.”
I think this is the point…. more people doing just what you said… buying/starting a business, which means more jobs, and more businesses and jobs for the gov’t to tax. Everybody’s happy.
I think you missed the point. He would tax shelter. As others have point out with Kansas, taxpayers just used the lower pass-thru rate to shelter taxes and not increase business formation nor employment. Since no FICA is paid on pass-thru income, it could have a seriously detrimental effect on SS and Medicaid/Medicare funding.
If Trump wasn’t such an insecure man-child with a short attention span, true comprehensive tax reform such as the FairTax could have been presented rather than some slapdash outline generated with just two days notice due to that OpEd from the Laffer Curve groupies in the WSJ.
I am betting on the Republicans crashing and burning before passing this insane piece of legislation. Also, there is zero chance that small business owners will only be taxed once at 15% on their profits. That would be the very furthest thing from revenue neutral and I doubt the “true believers” in the Freedom Caucus could swallow that. They killed Paul Ryan’s moronic health care plan and they’re going to kill this piece of crap too. At least there’s still a few Republicans who care more about the greater good than their pocketbooks (dying breed through).
This article really broke down this news thoroughly…do you know how many Americans will benefit from the new standard deduction? How much $ will that save people?
The higher standard deduction using 24,000 for a joint return will benefit many Americans because something close to 70% of America does not itemize. However, the issue I have is Trump wants to eliminate personal exemptions which is $4,050 per person on the return. That was not mentioned in his address nor has it been mentioned. If the personal exemption holds up along with the standard deduction of $24k, that may very well provide some tax relief for the middle class. Keep in mind that middle class in Columbus,OH is not the same as middle class in SF. By eliminating deductions on state/local/real estate taxes, that would force those who do itemize to have more than 24,000 per year in mortgage interest and charitable deductions alone. That’s a large hurdle for even SF homeowners. Middle class or upper middle class people certainly own homes with 8-10k in real estate taxes and pay 10k in state income tax. My feeling is those making $125-200k and own a nice home in a nice town will get hit hard if this passes. In my world, $125-200k is not wealthy but affluent middle class.
I would love to see this go through and think that maybe when all is said and done parts of it will get put through. There is too much political bickering right now and the opposition party has pretty much said they will fight everything he puts through tooth and nail. We will see with time, but I think that if they do get something through it will be a bastardized and somewhat watered down version of what we see currently.
There is no way this will pass as proposed, it’s a giant middle finger to high cost of living states, where upper middle class people would get a tax increase due to elimination of itemized deductions while rich people and corporations nationwide get a massive tax cut.
Those states (NY, CA, etc) have a lot of Republican congressman in affluent areas. Those republicans will not vote for extending the middle finger to their constituents, since that would result in losing the next election.
This is just excellent – I especially like the part where you say we pay more to the government than we save for ourselves! This is unheard of throughout history and just crazy.
People should at least put a ton in things like 401ks and IRAs to save pre-tax, but that’s beyond the scope of this article.
Small business is truly a great thing – you’re far more in control and you might now end up paying less in taxes. Even if you have a full-time job you should still think about business and if you can incorporate it into your life.
For the lucky few who are statistical outliers in creating and maintaining a small business, you are correct — this will be a beautiful, great tax cut. But most businesses need employees and not everyone in society can be a business owner (by definition). More likely these days, businesses are harder to create as incumbent advantages and inequalities in opportunities grow deeper. Endowing the winners of society with even more rewards while cutting the safety net for the “loser” employees seems nothing more than a cash grab to me. For those who believe in the Laffer curve, this is great, but as demonstrated in Kansas the Laffer curve seems concocted to create a “feel good” rationale for an unabashed cash grab.
You’re right – taxes should be lower for everyone, not just small business owners. People who are earning income via their labor are making more than investors who are making multiples of employment/labor income.
…are paying more*
Thank you! Not everyone is cut out to be an entrepreneur. We need to be able to hire people. If the folks we hire are screwed by taxes, they are more likely to be distracted by the vicissitudes of life and less productive while at work. I don’t think I should get all the benefits available because of my LLC; other folks need to do well in the system, too.
I really don’t think people realize how ridiculous it is that the government taxes the average American worker more than the average American worker can save. Folks need to really make this realization and change their financial habits.
Yes, this is truly astonishing. Just 100 years ago this would have been unimaginable in the United States. If you told someone at the turn of the 20th century that one day the US government would take 20% of person’s income — and that states and municipalities would take some of it too — they would probably not believe that such a thing could be possible. We have allowed things to get a bit too far possibly.
This is a tax hike for those living in high state tax states with a large number of dependents who depend on W2 income and cannot convert into flow-through income. In other words, medical doctors, lawyers, engineers, financial workers etc. who live in New York and California and have a family of 2 will get absolutely no benefit from this tax plan. The standard deduction goes up, but the personal exemptions for each dependent goes away and state taxes won’t be deducted.
Those who have the luxury of converting their W2 income into flow-through income will receive a huge windfall and further exaggerate the inequality in our society. Glad you’ll be using the extra money to grow your business, but I have a feeling most will just pocket it and buy another Ferrari or spend 50k on a luxury vacation to the Maldives instead.
As an owner of a successful CPA practice in San Jose, I’d love it if I and my clients paid less tax. However, taxes are the primary source of revenue for the government, so how are they going to balance the budget if they cut taxes?
The best solution to have a national sales tax and abolish the current tax regime. I wrote my Master’s degree in Taxation thesis paper on this topic. If the government taxes consumption instead of income, their tax revenue would be less volatile and tax collection would be easier to enforce. There is $2 trillion of income in the underground and shadow economy (drug dealers, cash employees, etc.) that goes unreported every year. If the government taxed spending instead of income, those tax evaders would finally start paying their fair share.
-Brian
https://fairtax.org/
I refuse to concede that 1 sheet of paper with double spaced bullet points constitutes a plan. It does stimulate debate and get your enemies to disclose their boundary positions while simultaneously hiding what your other hand is doing.
I think it is too early to start celebrating or crying (depending upon your position).
As a side note, the proposal to eliminate state tax deductions is literally a double-taxation. Let’s say you make $100k and pay 10% in state taxes and then 30% federal (effective). If you are unable to deduct your state tax, you will give $10k to the government and then your $10k will get taxed again! On top of that, the high-tax rate states, such as NY and CA are already subsidizing the red states with tax subsidies, so this is yet another subsidy. It’s hard for me to imagine that this is not political.
That being said, back to my first point, this is all going to get negotiated anyways and it’s hard to predict what will end up getting finalized, if anything. Currently, they are unable to even bring the healthcare laws to a vote, so I am not contemplating any serious changes in business planning yet.
Hence my thesis: Invest In The Heartland Of America Trend
I read that when you originally released that and agree with that! It’s also why I continue to buy real estate outside of Manhattan.
If this all does go through, hopefully it will encourage people in NYC and CA to leave quicker…particularly, the wealthy!
Hi Sam, thanks for all of the insight into the presidents proposed tax cuts. It will be interesting to see how this all works out. I am happy that I started a LLC in 2017.
I’m going to wait to see if it passes before celebrating. But it would be an awesome financial windfall for me too.
One thing I don’t get is the cutting of the tax brackets down to 3. Why? That is hardly the complicated thing about the tax code. And as you said, some middle of the pack people’s taxes will go up!