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Understanding the economics of tax reform

Written By | Dec 9, 2017

LOS ANGELES, December 8, 2017: Tax cuts are just one part of tax reform. Albeit a major part.  Undoubtedly there will be winners and losers whenever a major overhaul in the arena of public policy occurs. Those who benefit under the existing regulatory structure will most likely oppose changes. Unless the replacement structure also benefits them in some way shape or form.

Tax reform is no different.

The question of who pays more as a result of the pending changes is the question. What is important to recognize is the implications of tax reform.  Implications that deal with rates and others that deal with simplification of the overall filing process.

The pending rate changes will shift a fraction of the money supply from the public sector into the private sector by requiring less contribution from corporate and non-corporate individuals.

Government spending under tax reform

The difference in government spending will be added to the money supply through financing offered by the private sector and the central banks. When viewed from a financial perspective the 1.4 trillion dollars in additional liquidity is beneficial to the overall economy.

The interest charges are a form of capital gains for investors and the assets that they supply stimulate current consumption of raw materials, labor, and services. This perspective shows the pros and cons in terms of the time value of money created under strategic government  borrowing initiatives.

US tax reform: First step to global economic rebound

Current consumption fueled against future pending obligations for generated resources of production.

Ideally, if production increases at a magnitude that outpaces the factor of the obligation created in terms of its present value then the economy will net a positive return on its investment. This is why fiscal conservatives argue for a smaller government. One that limits redundancies and overlapping trappings of regulation.

Those are the policies that hinder the incentive to produce. Government by its design, with the exception of the military establishment, produces few if any finished durable goods. Or things that appreciate in value when listed on a balance sheet. Buildings for instance, are part of overhead and do not provide operating income.

Traffic violations for example, while standard part of any state legislative index, produces no tangible product, while guaranteed to save lives, the economic question is at what cost to other units of production.

At what point would fines not produce a change in the number of lives saved. And at what point do they become detrimental to the overall society.

Is a 1000 fine for speeding exorbitant, what about a million dollar fine. Money spent on non-infrastructure projects, with the exception of education are difficult to measure economically.

Where the regulatory element of tax reform comes in.

Santa Claus Rally vs. Tax Reform vs. the Federal Budget

How much reporting is good and how much of it is bad.

The new proposal would limit reporting to the size of a postcard. That is about half the size of a 1040-EZ form. It would ditch the parts of the itemized deductions and provide individuals with a larger standard deduction. It eliminates the personal exemption which nets out to be the same if the standard deduction is doubled.

And if the family has children they gain on the increase child tax credit which is a refundable credit.

Exemptions would only lower taxable income limiting the money you received to the amount of federal withholding. This new option puts more money into people’s pockets. And not just the pockets of the rich. The average Joe as well.  Tax reform makes income tax filing simple and easy to handle.

High-Income earners and Corporate Tax Reform

For the high-income earners, it lowers the rates making this is the perfect time to make that stock withdrawal, especially since the markets are showing signs of increased price volatility. Corporations with the new lowered rate will show more on the bottom line, even if earnings/revenues stay the same before taxes.

This increases the likelihood of a dividend check for grandma to gift to the grandkids for the holidays or on their birthday. Or to leave in her estate.

People who fight against the new tax reform measures are trying to polarize the issue based on self-interest alone. They are not viewing the larger economic picture. Nor are they proposing better alternatives to the ones currently being suggested.

Tax reform best for America

The best plan for Americans as a whole is when we all prosper. And this bill does just that. It puts American prosperity first.

Campaign promises are one thing, the real effects of public policy are in the bottom line. They are in the everyday decisions people will be forced to make if these changes don’t go through.

Kerry Baynes

Kerry Baynes is currently a Msc University West Indies, Financial Economics. As a research assistant for the New Jersey State Senate, he was responsible for research on economic, budget/fiscal issues, and the impact of tax policy. He served as a Media Strategist for Garry Cobb For Congress, in 2014 and Giordano for Assembly, in 2015. Since 2006, he acted as Manager of Alpha Strategy Group, an Urban Media Company. Currently an Associate at World Financial Group (WFG), he works to build and protect wealth for families and individuals from all walks of life.