Tax Cuts vs. Tax Spending

What is the right spark plug to jump starting an economy, tax cuts vs. tax spending?

In recent news, the President proposed tax cuts to jump start the U.S. economy.  The proposed plan, as stated in the White House press release will attempt to:

1. Cut taxes and simplify the tax code by taking the current 7 tax brackets and reducing them to only three brackets: 10%, 25%, and 35%.
2. Double the standard deduction.
3. Repeal the AMT (Alternative Minimum Tax).
4. Return the top tax rate on capital gains and dividends to 20% by repealing the 3.8% Obamacare tax.
5. Repealing the Estate Tax.

These policies raise the following question: Whether new tax cuts are the right way to jump state the economy?

The author of this Bloomberg article, describes how Sweden has taken the opposite approach and raised taxes and government spending to spur its economy.  According to the article, Sweden enjoys one of the highest average annual growth rates when compared to the US, OECD and other European countries,

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Sweden's Finance Minister, Magdalena Andersson, attributes Sweden's economic growth to its high taxes, strong union and an equal distribution of wealth.  See the following chart which reflects that the bottom 90% of Sweden's workforce's income exceeds the bottom 90% of the US workforce's income, and the disparity between the income of the bottom 90% of Sweden's workforce and the top 10% of Sweden's workforce is less pronounced when compared to the same segments of the US workforce.

Also noteworthy in the article is that Sweden has tax revenues at about 43% of its GDP, while the US tax revenue is only 26% of its GDP. The article points out that Sweden's economy is growing about twice the rate the US economy is growing despite having a heavier tax burden for its citizens.  The article attempts to attribute this disparity to the highest labor force participation, which generates higher tax revenues, and also is producing budget surpluses.

Of course, just because Sweden is raising taxes and spending the tax revenue to boost its workforce, doesn't mean that this strategy will work in the US.  In fact the Bloomberg article cites opposition to the Swedish tax policies and the fact that there is a possible vote of no confidence if Sweden raises its taxes.  The opposition would also point that the alleged surpluses are now being used to subsidize health care, education and defense.  The opposition would also point out that the surpluses are only the result of the prior regime which promoted tax cuts and that the current government is threatening the growth that is attributable to the tax cuts because of its lavish spending on social services.

So what should be the right course of action for President Trump? Should he cut taxes and hope for economic growth as alleged by the opposition, or should he raise taxes and fund social services which would then allegedly drive more economic growth? We may never know which method is best.

Regardless of the tax policy enacted by Congress and the President, in most cases everyone still has a tax liability.  If you know of a taxpayer not meeting its tax burden, CONTAC US to evaluate your claim and to assist you in determining whether to file a tax whistleblower claim.  The IRS is paying 15-30% of collected proceeds if the IRS proceeds based on a whistleblower's substantial and credible information.

Is True Tax Reform Likely in 2017?

Is true Tax Reform likely in 2017?

As recently released (See USA Today Article, and White House website), the President would like to pass a tax cut package.  The tax reform proposed by the President plans on addressing the following changes:

1. reduce the top rate on business income to 15 percent, from the current 35 percent rate on corporate income and 39.6 percent rate for other businesses;

2. cut individual income tax rates;

3. raise the standard deduction; abolish the alternative minimum tax (which snagged Trump for over $30 million in 2005, according to tax return data leaked a few weeks ago); and

4. abolish the estate tax.

Analysis of the Plan

See this article by William Gale, Hillary Gelfond and Aaron Krupkin of the Brookings Institute, which attempts to analyze the President’s Tax proposals.  Their analysis reflects 4 problems of the Trump Tax Reform Plan, as they see it:

1. The Trump plan would balloon the federal budget deficit. The article cites an analysis of the Trump campaign’s tax policy plan nu the Tax Policy Center that estimates a $7 trillion deficit over the first decade. The article also cites a guess by the Center for a Responsible Federal Budget stating a deficit of $5.5 trillion over 10 years.

2. The Trump plan would create the largest tax shelter for businesses. The article states that the plan would encourage business owners to cut wages and pay profits instead of wages. The article points out how despite the Trump Administration’s position to limit income shifting, the policy would encourage income shifting and how income shifting would be difficult to block.

3. The Trump plan would create a race to the bottom for corporate rates. The article explains that while the US rate would be lower than most other countries, history has shown that the other countries would just enact changes and lower their corporate rates, so that the perceived benefits of lowering the US rate to match international tax rates would be minimized.

4. The article claims that the Trump plan is very regressive. It claims the Trump plan would give huge cuts to the wealthy and virtually nothing to the low-income households.

Likelihood of Passage:

Regardless of the effects of the proposed Trump Tax Plan, one author doubts that the President will be able to implement his proposed tax reforms.  In his Law Review article in the Illinois Law Review, Daniel Hemel argues that the President likely won’t be able to implement the reforms because of key obstacles: 

1. President Trump has failed to fill key tax policy positions at the U.S. Treasury;

2. President Trump’s refusal to release his own tax returns has provided the opposition and/or moderate Democrats with cover from supporting his tax plan;

3. President Trump’s Tax Plan deviates dramatically from other Congressional tax reform plans and alienates Congressional members; and

4. Because President Trump doesn’t have the requisite support to avoid a filibuster in the Senate, he must use the budget reconciliation process to propose his tax reforms, and that further alienates Congressional members.

Hemel starts his article by citing that former Presidents Reagan and Bush (George W Bush) did not have majorities in both the House and Senate, but were able to pass tax reforms by day 206 of Reagan’s presidency and day 139 of Bush’s presidency.  

With respect to the first obstacle, Hemel states that President Trump has yet to fill key tax policy positions at U.S. Treasury, citing this Vox article, but that President Reagan’s nominee was confirmed on day 67 of his presidency (March 27, 1981) and President Bush’s nominee was confirmed on day 41 of his presidency (March 1, 2001).  Hemel states President Trump is pushing his tax reform policy without a tax policy team in place.  

Additionally, Hemel states that the President’s refusal to release his own tax returns has provided cover for moderate Democrats facing re-election to oppose the President.  Hemel states that President Trump’s refusal to follow tax transparency permits the Democrats to use a sound bite, namely, “we won’t vote for tax cuts until you release your returns”, and transform opposition to tax cuts (usually a political liability for Democrats) into a political asset by claiming that support is unwarranted unless the Democrats can see the effects of the President’s proposal on the President’s returns.  

Hemel also argues that President Trump’s plan fails to build support even within his own party’s Congressional leaders, as it deviates from other highly publicized and analyzed Congressional plans.  Hemel argues that instead of using House Speaker Paul Ryan’s 2016 proposed tax reform plan or Senator Orrin Hatch’s proposal as the Chair of the Senate Finance Committee, Trump has discarded the work done by the Congressional republicans and has forged an independent tax reform proposal that will ultimately depend on the same Congressional leaders he alienated to pass his proposals. 

Finally, Hemel argues that by lacking the support in the Senate to overturn a filibuster, Trump must use the Budget Reconciliatory Process, which limits legislation that would create a deficit outside a 10 year period from the passage of the legislation (so a temporary bill that would have no long term impact on the budget).  Hemel argues that since the Trump Proposal implies huge budget deficits, the Trump proposal may face opposition from Republicans deficit hawks, let alone Democrats, and so this is another reason why Trump’s tax reform plan is highly unlikely.

Alternative Explanation of why Tax Reform is unlikely in 2017:

In addition to Hemel’s article, Bloomberg’s Jonathan Bernstein, adds 7 reasons why tax reform is unlikely based on the Republican’s inability to repeal Obamacare (aka the Affordable Care Act).  Bernstein cites the following 7 reasons:

1. Trump Doesn’t Care about Policy: Bernstein cites President Trump’s appearance on Face the Nation discussing healthcare as evidence that President Trump is only focused on buzzwords and doesn’t care about the nuts and bolts of the policies.

2. Trump isn’t getting much help: Bernstein cites the fact that it appears as if the White House and the rest of the Trump Administration have not been involved in the negotiations regarding health care. He questions how a one page tax plan will spur tax reform by Congress.

3. Watch the House of Representatives: Bernstein argues that the real players are in the House and not the White house.

4. Congressional Districts Still Matter: Bernstein argues that House members still consider the impact of decision would have on their constituents and re-election prospects.

5. Congressional Republicans aren’t really good at policy: Bernstein argues that House Republicans still don’t understand tax reform to know how to implement actual tax reform. He states that many House Republicans still rely on party, committee, or faction leaders to assess the value of legislation.

6. Side deals aren’t happening in the House: Bernstein argues that House leadership is unable to provide the requisite inducements for House members to vote together to repeal Healthcare, and which can also cause the same problems or tax reforms.

7. Caring about the issue at hand matters: Bernstein argues that few Republican politicians advocated for the repeal of healthcare because that’s not what they really wanted to accomplish. He states that tax reform/cuts might be different to motivate House Republicans to enact change, but that still remains to be seen.

These two different viewpoints cast doubt as to whether real tax reform will occur in 2017.  

CONTACT US TO FILE YOUR TAX WHISTLEBLOWER CLAIM

Irrespective of your personal feelings about the Trump Tax Plan or the likelihood of its passage, If you have SPECIFIC AND CREDIBLE information of someone who is not paying their taxes, CONTACT US to discuss the filing of a Tax Whistleblower Claim on your behalf.  The IRS pays between 15-30% of the proceeds it collects from the tax violators if the IRS uses your information.  

Taxes and the Presidential Race

With the popular vote for President looming, there has been great debate over each candidate’s tax policy and the potential impact of their proposals. This blog has even attempted to outline the tax policies and provide analysis of the proposals. 

Recently, as found in this Forbes article, the candidates had their tax advisors debate their respective policies at the Tax Policy Center sponsored debate on October 13, 2016. 

As summarized by Forbes, Clinton’s plan would: “create new subsidies for working families that are caring for aging parents or children or have large medical expenses, significantly raise taxes for high-income households and businesses, and only modestly reduce the deficit.  See Tax Policy Center’s analysis of the Clinton tax plan.

Contrasting this is Trump’s plan, as summarized by Forbes, would: “reduce revenue by $6.2 trillion over 10 years, without accounting for macroeconomic effects and added interest costs. It would cut taxes for most households, but focus the great bulk of its tax reductions on the highest income households. Under his plan the highest income 1 percent of households would enjoy nearly half of the benefits of his tax cuts.”  See Tax Policy Center’s analysis of the Trump tax plan.

Criticism of Donald Trump’s Plan:

According to a NYU tax law professor’s paper, Lily Batchelder’s, Trump’s plan would increase the tax liabilities of “millions of low and middle income families with children [namely, 7.8 million families with minor children], with especially large tax increases for working single parents” See also this Washington Post article outlining the problems with Trump’s plan. 

Ms. Batchelder’s position is that by removing personal exemption in Trump’s plan, Trump’s plan would actually increase the tax burden on married persons with at least 3 children, and unmarried persons with 1 child.  She also argues that removing the head of household status would increase the tax burden on unmarried persons with one dependent. In addition to removing the personal exemption and head of household filing status, Ms. Batchelder argues that the bracket increase of the lowest tax bracket would increase the tax burden on all taxpayers for the first “$9,000 to $18,000 of their taxable income.  Finally, Ms. Barchelder discredits the Trump plan’s estimate of saving because as she argues the deduction and credit for child care won’t be effective for low and middle income families because even with the deduction and credit, the deduction and credit fail to compensate the families for the increased tax burden attributable to the other Trump proposals.

Contrasting Ms. Batchelder’s position is Steven Miller’s (Trump national policy director) analysis, which can be found in the Washington Post article.  According to Mr. Miller, Ms. Batchelder’s analysis fails to properly account for the $500 per child match for child care credit proposed under the Trump plan.  Mr. Miller also states that another error in Ms. Batchelder’s analysis is that it fails to account for the “effects of the tax-free spending on both children and elderly dependents that is addition to either the new deduction or those in the current law.”  Mr Miller also stated that the Ms. Batchelder’s analysis fails to account for the benefits to economic growth which will be generated by the Trump plan. Finally, Mr. Miller stated that the Trump plan would instruct the the Congressional committees implanting the changes to ensure that the Trump plan does not raise the taxes on law or middle income earners.

Criticism of Clinton’s Tax Plan:

While analysts have stated that the Clinton plan would increase taxes on the rich and big business, one key criticism is that the Clinton plan would further complicate the tax code instead of making the tax code simpler.   See this NY Times article.  As stated in the article, Clinton’s plan wouldn’t eliminate the loopholes, which Trump has taken advantage of (allegedly not paying taxes on his income due to carryover losses, see this NY Times article).

Another criticism of Clinton’s plan it that it isn’t a sweeping overhaul of the tax code.  As stated by Alan Cole, an economist with the Tax Foundation policy center, “It‘s more tinkering at the edges,I wouldn’t call it reform. There aren’t any major reformulations to make the code simpler or fairer. It’s basically just a tax increase” for the top income bracket.  See this NY Times article.  Clinton’s plan also fails to address the corporate tax rate (at 35%, one of the highest in the developed world) and proposes a change to capital gains to encourage corporate governance changes instead of addressing corporate governance through targeted legislative policy changes.  See this NY Times article.

Conclusion:

No matter which candidate you support, there are two stark contrasts to their tax policies: One is choosing to tax the über rich while keeping most of the existing taxing structure and using the additional revenue for social programs [CLINTON].  While the other candidate is choosing to lessen the burden on the top to spur economic growth, and instead place the burden on the middle and lower class [TRUMP].

The question that continues to loom is how will these policies affect the IRS and their enforcement of the code, post-election.

If you know of someone not paying their taxes (a minimum of $2,000,000 in taxes) and want to report the individual/corporation for this failure, Contact us to file a claim for an award from the IRS.  The IRS will pay an award (between 15-30% of the taxes collected) for specific and credible information the IRS uses in assessing additional tax liability against taxpayers.