What does tax reform mean? Depends on who you are
There is an old story from the Cold War about a journalist who asked a Soviet politician what the difference was between communism and socialism. The Russian explained in a capitalist society, one man takes advantage of another. In a communist society, it is vice versa.
And so it is with the tax system. One person's sacred cow is somebody else's hamburger. Note that in the health care vote and the tax reform negotiations, voting is along party lines. Common sense should tell you a few Democrats would agree with the changes and some Republicans would disagree. Sadly, most politicians have a higher level of loyalty to their party than to our country.
They should be voting on the merits of the reform as it affects us, not the party bigwigs.
There are a few things to consider looking forward.
There are assumptions that may or may not be correct. Tax reduction is a good idea — period. Saying Washington spends money like a drunken sailor is a gross understatement. A drunken sailor cannot spend his lifetime income as well as his kids’ and grandkids’ lifetime income in the present. We all know what happens to people who grossly overspend. Multiply by 330 million people, and you get an idea as to where we are headed. Cut spending.
There is the assumption if we cut corporate taxes, big business will use the new funds for expansion, relocating back to the U.S. and higher pay and benefits for employees. Some will and some won't. The level of greed at the top in large corporations does not bode well for this assumption. Read up on Wall Street leading up to 2007 and 2008. Insane blind greed. How does Congress force the corporations to use the windfall from tax cuts in a manner that benefits Americans? I don't think you can. If you could, many liberals would be supportive. Most Americans do not wish to fund a bigger house in the Hamptons.
Doubling the standard deduction sounds good except for this. I believe nearly half of all Americans pay no income tax. If so, why would untaxed citizens participate in the political system when you are not invested in it? If you get your livelihood from the government, then your interest is in getting more from the government. It is commonly understood if you have no investment in the system, you care little about outcomes. The lower levels of the economic strata are going to vote for their own wallet. Add those people that are on the government payroll, and we who pay taxes have to maintain our political diligence.
There is an interesting conflict I had not thought of. I don't remember the deduction for state and local taxes ever coming up before. One of the issues is the deduction causes those of us in low or average tax level states to subsidize the high tax level states. So, if you are in a 35 percent federal income tax bracket and your state tax deduction is $10,000, we are paying $3,500 dollars of your state taxes for you. If you are in Florida over the winter, listen to the 50ish-looking couples who are retired and living very well. There is a good chance they are government employees from the northeast. I wonder if they ever think of thanking the late 60ish recent retirees who still are working to fund their midlife retirement.
There are issues that are much more complicated than they appear on the surface. The equalization of tax treatment between big business and small business is music to my soul. The problem is that a long-term concept must be revisited. The issue is pass-through entities and distinguishing between passive and earned income. Most small businesses are S Corporations. Congress expressed its desire to equalize the tax levels for the pass-through income. The past problem had to do with sub S income being earned income for self-employment tax purposes. The idea was that income you had produced personally was earned income. In a professional office, you would have to pay self-employment taxes on what the owners produced. The income from other employees came from your investment and ownership of the business. That was an issue in almost every sub S audit. I will be curious to see how they work out that one.
Expensing is another concept that is more complicated than it appears. Expensing is the writing off in the year of purchase of new or used equipment, furniture, fixtures, etc., up to $510,000 in tax year 2017. It appears to be a great tool for lowering your taxes by buying more equipment. The limits have been raised over the past 25 years, and the push is more allowance or no limits. It is common practice for CPAs to project income at the end of the year and the client buy equipment to lower income. What if you don't need any more equipment? There is the temptation to take the quick write off now instead of normal depreciation. Business owners have to be careful not to take deductions now that will be more valuable if profits rise to a higher level of taxes in future years.
Nothing is as simple as it appears. The Flat Tax was created supposedly to simplify the tax system for the American family. The person who was the biggest pusher of this tax was Steven Forbes. We should all have been deeply touched by Forbes’ concern for Middle America. The question I raised at the time was how do you explain to a laborer they have to pay taxes on their wages, but the super wealthy would pay nothing on their dividend, interest and capital gain income? The idea was that making investment income tax free would encourage investment. Sometimes, you have to ask yourself if these people really believe in what they peddle or are they so cynical that they can stand in front of a microphone and spew stupidity?
If you are a National Small Business Association, National Chamber of Commerce, NFIB member, this is your time to get involved and put your money to work. The pressure on Congress from special interest groups is intense. Don't do the old, “I'm too idealistic to provide money for lobbying.” If you don't get involved either volunteering or through contributions, you are directly responsible for the negative impact taxes have on your business. One of the great assets we have is the public recognition of small business as a positive force in America. We need to capitalize on that perception.
Paul Hense is the retired president of local accounting firm Hense & Associates and past chairman of the Small Business Association of Michigan.