Friday, December 22, 2017

My thoughts on : Tax Cuts And Jobs Act Of 2017

This is not a review of the new tax law (See full PDF) signed by President Trump today. This is just what I feel about the things that matter to me, and things that I feel are important.

Full disclosure on political views. I am neither a Republican, nor a Democrat and one of the “Never Trumper” guys. I had to vote for Hillary Clinton because of Trump’s candidacy. My views can generally be categorized as “social liberal, fiscal conservative”, but that’s not very accurate either. For example, I strongly oppose “Sanctuary Cities”, and I do want near-free college education for all. So there you go. Whatever prevalent label you attach me, will likely be wrong.

Full disclosure on fiscal views. 

Taxes are necessary. Duh, yes. The point is, “some” taxes are necessary. I do not know what the ideal tax rate should be, and that's not the point of this post.

Simple is good. Duh again, but important to list. Not just because of tax filing headaches, but also for cost of enforcement.

Deductions are unfair. Yes, including, mortgage interest deductions, and even 401K deferred taxes. Due to tax brackets, higher income people get more out of these deductions that lower income people. Most deductions and credits are not universal, they favor one group over another.

Double taxation is unfair. Yes, even when it happens to rich people. 



Now about the things that directly affect  me.

Mortgage interest deduction. I live in the San Francisco Bay Area, where housing prices are, and have always been in the stratosphere. Now mortgage interest only up to 750K can be deducted. It most likely will slow down the increases in home prices. That’s good. My house value may not go up as much, but it’s good for future home buyers. Affordable homes are good for the society. Primary residence is not an investment, or a lottery ticket to retire rich. I support this. 

Changes to AMT. I wish they had repealed AMT. But at least the new law takes a large section of the population out of AMT. My problem with AMT is not the actual taxes paid, but it makes taxes complicated. If higher taxes is what’s needed, increase the tax rate. Don’t complicate the tax code. Again, even if my effective taxes hadn’t changed, I would still support repealing AMT. Well, that didn’t happen, but this is still a big positive.

Changes to SALT deductions. The new law significantly limits how much state and local taxes can be deducted. This one hurts me. It’s very possible that due to AMT changes, tax rate reductions I might come out even. Regardless of the impact on me, I support this. Federal taxes are paid for services received from federal government. Why should state taxes be deductible any ways? Now this will get Californians angry. But I do think California taxes are too high, the state government is too big and there is a huge waste of taxpayers money. Maybe now, people will get more conscious about the taxes paid to their state government and demand lower rates, and more efficiency. It might make California less socialistic, and that would be a good thing. This kick in the gut was needed, and my only complaint is it does not go far enough.

Rolling back of tax rates. The tax rate reductions for individuals is not permanent. If deficit was an issue, then why cut taxes on high income earners? Why not make the tax rate cut permanent for lower income people? Maybe it’s political game of kicking the can down the road, and future congress may make the rate cuts permanent. With the current wealth gap, and a booming economy for the wealthy, the rate cuts should have been done only for the lower income people. I view this as a big negative in this tax law. 




Now for changes that do not directly affect me.

Corporate tax rate cut. Lowering corporate taxes is a good thing. I wish it was tied to job creation, or increased pay for lower salary grades. Especially considering the trillion dollar deficit that’s being added by this law. As it stands, companies most likely will return cash to shareholders via dividends, buybacks etc. That’s perfectly fine from shareholders’ point of view. The issue is these shareholders are mostly in the wealthier section of population. So the country as a whole gets a trillion dollar increase to the already high deficit, and the majority of the population gets nothing much to show for it. That’s my current feeling. If it does spur job growth, pay growth, well, that’s what the Republican congressmen and Trump’s team are promising. Only time will tell. So I am neutral on this right now.

Estate Tax. I will never be impacted by this, but just repeal that thing. If you need higher taxes, just increase tax rates. Do not double tax. The new law does not repeal it, but at least increases the threshold. It's not enough, but still a positive.

Questionable deals. There is a nice provision for pass through businesses, which may be needed. But the way it was added, raised lot of conerns. There is lot of information available on the CorkerKickbacks. Similarly there is a nice concession for private jet owners. That’s what politics has become today. People who write laws, make sure they get benefits out of it.

There is lot more in the tax code, but these are the points on which I have an opinion.

Summary. There is lot to like about this law. Whether the expected economic expansion happens and if it justifies the deficit or not, only time will tell. I am optimistic at this time.

What would be the political implications? This is definitely a great legislative victory for President Trump, and he has delivered on a big campaign promise. It’s also an accomplishment for both Rep Paul Ryan and Senator Mitch McConnell. It would very likely help the Republicans in 2018 midterm elections, because there will be a short term boost to the economy. The deficit concerns are much longer term concerns. The Republicans have taken a calculated risk, or a gamble if you will. I hope they are right and the benefits of this are reaped by lower income people as well. If not, there are always elections where we can vote for candidates that will undo these policies. Just like what the current administration is doing.

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