Wednesday, October 28, 2020

The Good, The Bad and The Ugly

Tax Reform and the Hypocrisy of our Political Establishment and Theory of Trickle-Down Economics

A win is a win is a win, or is it?

The Republicans signed, sealed and delivered a tax reform package that President Trump signed into law in December of last year. The question is, is it a sound reform? Or is it a flawed and skewed major piece of legislation that favors the rich and ultimately will increase our national indebtedness, furthering the gap between the wealthiest Americans and the remaining classes?

Many economists believe the tax reform was actually an unnecessary tax cut, implemented at an inappropriate time in our current business cycle. Other economists believe the new tax code has been implemented closer to the peak of our current expansion than many assume, thus prolonging the inevitable downturn. And some in the business sector who favor the new tax code believe it will spur the growth needed to eventually eliminate deficits that continue to plague our economy and increase our nation’s indebtedness.

These differing views leave taxpayers with many questions. Will this new fiscal stimulus beneficially supplement the nearly decade-long monetary stimulative policy of quantitative easing, which induced artificially low interest rates? Will it place America back on a path of long-term economic prosperity? Or will the reform further distort business cycles and the natural equilibrium between supply and demand and continue to fuel exorbitant spending, bringing America closer to what some economists perceive to be an inevitable economic meltdown?

The Good:

During his campaign and after the election, President Trump promised his electorate he would implement sorely needed reforms that would make “America great again.” At the end of 2017 he kept his word and signed major “Tax Reform” legislation that became effective January 1st of this year.

America is in dire need of reforms. Our former tax code was surely one that needed to be changed. There were numerous items within our tax structure that were addressed: Expatriated money (income earned outside the reach of the IRS), the corporate and small business tax structure, an inadequately low standard deduction, a reduction in the number of tax brackets, the elimination of excessive deductions, and an unreasonable inheritance tax threshold, just to name a few.

Although many of these flaws in our old tax code were attended, some were either done so inadequately or incorrectly, and others, not addressed at all.

The Bad:

Expatriated money is given a proper incentive to return to our shores, but without a directive as to how much of the funds can be used for stock buy-backs or returned to investors in the form of dividends, neither of which substantially benefit the majority of Americans. Mandates should have been put in place that would direct the bulk of these funds to be invested in infrastructure, job training, modernization of equipment and plant expansion, and equated to the number of jobs created, wage increases and the hiring of additional employees.

The Small Business Administration (SBA) Office of Advocacy estimates that small businesses create roughly 7 out of 10 new jobs. Yet, small businesses were given a smaller tax break than large corporations, which were said to have the highest corporate tax rate among the Organisation for Economic

Co-operation and Development (OECD), which represents most of the world’s major economies. In reality, the former effective corporate tax rate was likely between 17-23 percent, because, as estimated by the U.S. Government Accountability Office (GAO), nearly 20% of American corporations paid no taxes in 2016.

The standard deduction, raised to $12,000 for individuals and $24,000 for couples, may not benefit middle class Americans, who have lost exemptions and a good portion of tax deductions in states with increasingly high property assessments, and who purchased their homes decades ago.

Americans did get somewhat of a simplified tax code if one solely considers the reduction in the number of tax brackets. But, when one takes into account the enormity of the reform (more than 500 pages), one can only conclude the plan is far from simplified and the majority of tax filings most likely cannot be completed and submitted on a single page format.

One must also question the fairness of the reform. Did the richest Americans among us really need to have their top bracket lowered from 39 to 37 percent, when only a million or so households fall under this bracket? At the same time, roughly 24 million households, as in the former code, fall under the bracket with the greatest percentage increase (10 percent) between brackets. Instead, it would have been far more appropriate to levy a surtax on the ultra rich as a sign of good faith and as an initial step toward eliminating deficits and eventually reducing our national debt. Since the middle class and poor will most likely bear the brunt of future economic downturns and hardships, isn’t it just to expect the wealthiest among us to contribute a little more rather than less of their annual incomes to cushion the impact?

President Trump was correct when he said the inheritance tax is one of the most unfair forms of taxation, for it penalizes income when earned and wealth accumulation again upon death. This so-called “death tax” will benefit the large farmer and other small businesses by allowing owners to retain family farms and businesses passed from generation to generation, which is a sound improvement to the current code. However, although the inheritance tax ceiling should have been raised, it should not have been eradicated. Eliminating this tax in its entirety may limit charitable giving when the greediest of benefactors are given such a viable alternative. In the long term it may very well form a new class of zillionaires; a nobility class within the upper one percentile. Although this form of duplicative taxation is unfair, there are other inequities within the system that dramatically affect those who are not as fortunate as the wealthiest among us who were adversely affected by the former “death tax” parameter.

One must also ask how eliminating the individual mandate for healthcare, with no viable alternative in sight, provides a safety net for those unable to pay for insurance, many of whom are members of President Trump’s political base. Will the uninsured be able to join or remain in the workforce, and if so, will they be healthy and productive and able to purchase the very goods they make or the services they provide?

Many items that would benefit most retired Americans were not addressed. The tax levied on Social Security benefits, including previously taxed and contributed funds, remains taxable income for many Americans with earned income. In other cases, the earned benefit is substantially reduced on a one-to-one dollar basis if earned income exceeds government limitations. And, why should the date for withdrawal of earned income set aside for retirement (in instruments such as IRAs and 401Ks) be mandated to begin no earlier than age 59½ in most cases, and mandatory withdrawals set at age 70½, when government pension retirees can make withdrawals at a far earlier age?

There is unfairness in the special treatment of passive income over earned income. In many instances, passive income, such as capital gains, is taxed lower than earned income. Why should income on any investments (other than that of risky venture capital gain) which can create new businesses and numerous jobs, be taxed at a lower rate than income earned by those who enter the workplace and toil on a daily basis? And, if capital gains are treated differently, why shouldn’t interest and dividends be treated in the same manner, which would surely benefit retirees? Furthermore, shouldn’t 401Ks, IRAs and other contributed retirement funds be treated in the same manner as long term capital gains?

It is obvious to the vast majority of Americans exactly who will benefit most from our new tax code. Even so, sadly, what concerns most of us is, “How much will I benefit and fare under this new legislation?” rather than the immorality of the imbalanced benefit distribution, our annual deficits, and our spiraling national debt, which is fast approaching 21 trillion dollars.

There are rational economists who believe the current tax code will eventually direct 80 percent of the benefit to the wealthiest within our nation. If true, I wonder if the majority of the electorate will continue to accept this immoral, uneven distribution of taxpayer money, knowing that the richest among us will reap the benefits at their expense. Every dollar spent adds to our nation’s mounting debt, which rests upon the shoulders of every American and those in future generations to come. The administration and current majority in Congress are betting we will accept it, figuring that if we earn additional money, we will care less about what the most affluent make. Throughout history this theory has proven to be somewhat true. This “trickling down” of propriety during times of economic expansion often obscures our attentiveness and compassion for those less fortunate. We tend to care little of the past, and show concern mostly for what can be done for us today, and in the future. However, it is also proven throughout history that during severe downturns (as experienced in the not too distant past), we begin to question and rebel against injustice and inequity when we become the afflicted.

In the short term, the reform tax legislation will likely prove to be stimulative, and may very well extend our current economic expansion, especially when supplemented with other planned reforms. In the intermediate term, although questionable to many, the new tax code may continue to slowly prolong our expansion and continue to prove somewhat successful. But, what are the ramifications of an unevenly distributed and unfunded tax cut in the long term? Will it prove to be effective at best, or disastrous at worse? How will this additional stimulation (atop of quantitative easing) affect interest rates, since we are entering a 25-35 year upward cycle, and for every one-percent increase in interest rates roughly $160 billion in servicing fees are added to our rising national debt? Will it further balloon our nation’s debt, widen the gap between the ultra rich and dwindling middle class and increasing poor, and irreparably damage our nations credit?

When proposing tax reform, President Trump assured the electorate that all Americans would greatly benefit from this reform and the future modifications to come. He also stated that planned legislation would benefit all, but mostly, the middle class. Being fair to the President, as previously written, one must admit this legislation’s ultimate success depends on other components, such as healthcare and entitlement reforms and a sound infrastructure plan with substantial funding that he hopes to obtain. The latter will benefit all if constructed correctly, but the former two, I fear, like the tax reform, will disproportionately hurt those who need the greatest relief. If this should occur, the President will not have kept his promises made to the American people and to his political base.

One must also ask, how does President Trump and Republican Party define America’s middle class? Fact Check writes that “There is currently no standard definition of middle class,” although some in Washington falsely imply they believe it encompasses those annually earning between $200,000- $250,000, even though this would place these recipients in the upper 97.6 percentile of all working Americans. (In 2016, the mean county income for all counties in America was $47,589, a statistic released November 30, 2017 by the U.S. Census Bureau.)

The Ugly:

Hypocrisy is defined as “a feigning to be what is not.” President Trump rightfully referred to the political establishment as a “Rigged System.” Unfortunately, our new tax legislation may very well, in the eyes of many middle and poor income families, ultimately permit Trump to be labeled as an integral part of the very political system of establishment that he rigorously ran against: a sector, driven by lobbyists and special interest groups that for years lusted for such reform. In favoring and then signing this tax legislation into law, he has further rigged the system in favor of corporate America and the most affluent, and in doing so, most likely will further widen the gap between the classes. To promote this “Tax Reform” as a gift to all Americans, especially the middle class blue collar workers, will likely, in the long run, prove to be an unwanted gifting.

Ironically, most members of the Republicans establishment, including sitting members of Congress, didn’t favor the candidacy of Trump and didn’t want him as their president. Yet, at a recent photo shoot celebrating the passing of “Tax Reform,” many of these very same hypocrites referred to him as “The greatest President of all time,” as some expressed their love and admiration for him. One must wonder if this has anything to do with the fact that many from this lot will personally benefit from such legislation. Simply stated, I found their behavior repulsive and disturbingly sickening. I realize that politics makes strange bedfellows. This facade should not flatter President Trump, but instead enlighten him to the realization that these are not real friends, because a true, loyal friend will tell him what he needs to hear, not what he wants to hear. And a true friend rarely abandons support instantaneously, but rather in a prolonged, timely manner.

This trickle-down tax plan can best be compared to a dam, lake and rainfall. If rainfall increases the height of the lake by two inches and the floodgates are open to accommodate the additional accumulation, upstream and downstream will benefit equally. If the rainfall is 10 inches, and the floodgates are open to drain only three inches, downstream will benefit minutely from the additional inch, while the lake will heighten substantially. If additional rain falls and the accumulation is handled in the same manner, the lake will continue to rise until the dam breaks. The lake will be diminished and those downstream, devastated.

The President and Republican Party wanted a win, but there are good wins and bad wins. Having once been an excellent high school athlete, President Trump should know this. Of equal importance, he should also recognize that it’s not simply about winning or losing, but how respectfully one treats the opposition and how fairly the game is played. Because the allocation disparity as a result of this tax reform is not remotely close to a win for all Americans, and because the reform was implemented by one party, history tells us this legislation of the rich, by the rich, and for the rich will likely not endure the test of time.

Episode 65 of “The Twilight Zone” titled, “The Obsolete Man,” which aired June 2, 1961 on CBS, included the following in its opening monologue: “But like every of the super-states that preceded it, it has one iron rule: Logic is an enemy and truth is a menace.”

In the years to come, will history show this idiom proved correct when applied to the actions of America’s leadership and citizenship? Will our great nation and our people, like many of our material possessions, succumb to planned obsolescence, or will logic prove to be our friend, and the truth, enlightening and enduring?

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