WASHINGTON, November 28, 2017 — Tax reform happens at least once a year. Tax reform this good happens only once in a lifetime. Markets are showing the effects of the economic optimism generated by this GOP tax season.
The very hope of tax reform …
Third quarter GDP grew at a 3 percent annual rate, slightly above its earlier pace of 2.4 percent. Unemployment is down and tax cuts haven’t even kicked in yet. By all estimates, job growth is steadily increasing. On November 4, the Dow rose to 23539 and the Nasdaq to 6764.44. Ten-year Treasury yields were 2.343 percent. According to Treasury experts, exports, strengthened by a stronger U.S. dollar, improved overall.
Half of the 35 major indexes representing the world’s biggest stock markets by value have hit all-time highs this year, the most since 2007, according to the Wall Street Journal.
Tax reform, a major Trump campaign selling point, is working its way through Congress. It features a host of changes to the way the U.S. tax code operates. Republicans are doing everything they can to ensure they have the votes. The bill H.R.1 passed the House 227 to 205 on November 16. Thirteen Republican no-votes still allowed the bill to leave the House.
Ivanka Trump on Tax Reform
The bill’s top three elements, aside from adjusting tax rates, are: Repealing the alternative minimum tax (AMT); increasing the standard deduction for nonbusiness filers; and modification of foreign income and bond reforms for business filers. The GOP tax plan provides across the board tax relief to working class American families. Doubling the standard deduction is the single most important modification benefiting all Americans.
The alternative minimum tax
The elimination of the AMT, though not crucial to the business environment, is a crucial policy measure. Trump is dedicated to simplifying the tax code. AMT is an onerous complication, negating income exemptions permitted under regular tax. The exemptions are usually investment related, some form of capital gains that precipitate earnings exclusion from taxable income.
Congress created the AMT in 1969. It was designed to curb aggressive tax avoidance and was aimed at incomes of $30,000 or higher. It requires tax filers to calculate income tax liability twice: once under standard measures and again under AMT rules.
Tax code Elements
Congress passed the first personal income tax in 1861; the first peace-time tax was passed in 1894. The rate was 2 percent on incomes over $4,000, and the tax affected just 10 percent of households.
The income tax has expanded into a highly complex, fiscal juggernaut. Since 1955, it has grown at a rate of over 144,000 words per year, with the tax code now totaling about 2.5 million words—about 74,000 pages—and associated tax regulations add another 7.5 million words. Americans now spend 6.1 billion hours per year to comply with it, at a cost of over $234 billion.
“We’re doubling the standard deduction, increasing the child tax credit and lowering tax rates across the board.” House Speaker Ryan.
Tax reform proposal
The impact of the proposed changes to the tax code occur predominantly below the line, for instance limiting the mortgage interest deduction for new debt to $500,000 and repealing deductions for medically related expenditures and business related state and local taxes. Further, it will strengthen American business related contributions the global economy through a lowered corporate tax rate of 20 percent, down rom 35 percent. This would have a hefty positive influence on American economic activity.
Government’s role in taxation
Who pays more in taxes? High income earners in society; 47 percent of individuals pay and owe no federal income tax. Who benefits most from each collected tax dollar? Since the 16th Amendment’s ratification in 1913, that question is one all fiscal policy teams want to answer. The answer is complicated: We can’t remove government’s impact on individuals and the economy. Our system includes progressive income taxes and substantial transfers, further muddying the question of who benefits most.
If the tax code were designed simply to raise revenue, it would be highly inefficient, its complexity an obvious negative. But it is also designed for social engineering, preferentially helping some businesses, some sectors of the economy, and some socioeconomic groups.
The social engineering element—and certainly the political need to provide spoils from the tax code to some groups of voters—is why the tax code seems to treat prosperity and economic growth as irrelevant. The government’s role in all this is not simply to raise money to provide for necessary public goods and services. The government is no longer simply in the business of providing national defense, operating embassies and delivering the mail. It has vast bureaucracies devoted to agriculture, veterans’ affairs, education, housing and urban development, health and human services and more.
The more the government gives us in the form of services, the greater its control of the economy and our lives. But the economy does better the more it’s left alone; We make the Faustian bargain to get from the government what we could get on our own, at a cost of economic liberty and economic growth. High taxes drive wealth and talent away, while lower taxes attract both.
Theoretically, government acts as insurer of last resort. The more healthy the private commercial, insurance market there is the less of a need there is for government selection. It is important to remember that these two are always in apposition: social insurance [government] and high incomes.(Hillerman 2013)
Lowering Taxes is Good
Lowering taxes is never an unpopular viewpoint unless the taxpayer is a Democrat. There is no growth related economic reason to knowingly avoid expansionary fiscal policy post-recession. That’s first. Further, in order to maximize productivity the most advantageous policy agenda utilized –propping up saturated growth cycles: through fiscal policy levers, applied tangent to all points lower than best fit trend lines of the population consumption matrix curve, is inevitably the most optimal course.
Considerations for Farmers, Small Businesses, Middle Income Americans, and Deficit hawks are pulled into the mix of debates whenever anybody mentions the topic of tax reform. Along with addressing inversions and reinvesting in American Industry from the consumer side and expanding on modern day implementation of supply side economics.
The research is there on tax reform. It is always clearly evident. Everyone in every major special interest group has a stake in some part of the proposal and absent the final outcome is looking forward to it. Unlike health reform where the pro’s and cons net out to a price differential, higher or lower quality becomes the only divider coupled with consistent innovation. The Health talk is always a good discussion to be had though. And the further we consider the optimal scenario for the perfect individual living experience the better.
And while not always specifically mentioned in such a broad based context. It is, nevertheless, the reason why the tax code was invented: to change individual views of the economy directly for the better.