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Thursday, October 12, 2017

Tax Reform Issues

Speaker Ryan explaining tax reform at 10/4/17 Facebook Event,
holding the postcard form (see my comment below though)
There are a lot of uncertainties in trying to fully understand tax reform with a few pages of ideas where lots of important information is missing. Don't get me wrong, tax reform is needed as our system is too complex, inequitable, inefficient and doesn't collect all of the tax owed (leaves about $385 billion uncollected annually).

On 10/10, Speaker Ryan noted 5 ways that tax reform will save people taxes in 2018. Each seems correct, but each has uncertainty connected with it because we don't have legislative language yet or hides that the framework, despite suggestions of modernization, doesn't fully modernize our tax system. Here are his five items:

1. Bigger standard deductions - He says it will be "nearly doubled." The framework indicates, for example, that the standard deduction for a single person will be $12,000. It is $6,300 today. What he doesn't say though is that the personal and dependency exemptions go away. Today, that's $4,050 per person. While the child credit is supposed to increase and apply to more families, today, it only applies to children under age 17 while the dependency exemption can cover some children up to age 23. So, not enough details yet to indicate that any individual paying income tax today will see lower income taxes in 2018, particularly if they have a few children and lose itemized deductions that would have been larger than the new standard deduction.

2. Lower individual rates - The framework suggests rates of 12%, 25% and 35% and perhaps a higher rate for high income individuals. Today, the lowest rate is 10%.  Actually, the lowest rate today and under the plan is 0%. If someone today has income too low to pay income taxes, that should continue under the framework. These folks - about 45% of individual filers, won't see bigger paychecks. There is no talk of lowering the 15.3% payroll tax. Some of these zero bracket filers might be getting a larger refundable child credit, but they won't see that until they file their tax return. Also, we don't know where the rate brackets start and end so we don't know for sure if everyone drops income into lower rates.

3. Capped rate on small business of 25% - Leading up to the release of the framework, there was talk that this would not apply to all businesses and perhaps some personal services, such as accounting, would not get the cap. Again, depending on where the individual rates start and end, most small business owners should not be in the 35% rate because they are not today. [TaxProToday, 9/13/17]

4. Immediate write-offs for business investments - The framework suggests allowing expensing of capital investments. Ideally, this would also include intangibles and both acquisition of new and used depreciable property.  Details are missing.

5. Increased child tax credit - Apparently, this is to adjust for repeal of the dependency exemption. The dependency exemption though can apply to more than your child. Also, the current child credit covers a narrower age range than the dependency exemption.

Speaker Ryan also notes that if compliance costs go down, that is also a tax cut. I'm not sure we'll see a significant drop in compliance costs. There are still complexities such as the child tax credit and hopefully, the Earned Income Tax Credit remains. Promotion of IRS VITA sites and other low-income tax preparation clinics would help keep compliance costs down for many.

Caution - A postcard size return doesn't say anything about the complexity level of a system. We could file on postcards today if the IRS would take less information on the components of our taxable income. The postcard in the Republican blueprint of June 2016 didn't have a place to sign or a penalty of perjury statement or information about the taxpayer or where to deposit any refund.  AND, why are we modernizing our tax system to fit on a postcard rather than to use today's technology to not even have to file for most people because the system already has enough information to just sent a bill or deposit the overpaid taxes in your account or send you a secure debit card?

There is a lot of good about tax reform and it would be good to hear more about that rather than claims that don't seem completely accurate or complete.  And there is a lot of information often missing such as the effect on the deficit and debt, distribution of the tax cuts among different income levels, transition, timing, and more. Speaker Ryan's 10/10 post includes a video of him explaining the tax system and notes many good ideas, we just need to be critical listeners and watch for missing pieces.

What do you think?

Note: These views are mine and not necessarily those of my employer or any organization I'm involved with.


Marty Sullivan said...

Janet - Always enjoy and learn from your posts. One comment and one question: (1) As helpful as they may be to middle class, I believe that under reconciliation rules reducing social security taxes (or any change to that program)are subject to point of order in Senate. (2) Why is allowing expensing of used depreciable property ideal? Won't this create incentive for churning? We economists only want incentives for new investment. Regards. - Marty Sullivan

Professor Nellen said...

Marty, thanks for the comments. Given problems with Social Security funding, I don't think it should be reduced, just wanted to illustrate that it's the only tax many low-income taxpayers pay so a cut there would be the only way to increase their paycheck. Even if the refundable portion of the child credit is increased, it won't show up in a paycheck.

Good point on used equipment. Used equipment falls under the section 179 expensing election today for simplification purposes rather than for economic growth purposes. If this rule remains with tax reform, that simplification will remain.

Seems that purchase of used equipment should still help with economic growth if that is what a business can afford and the equipment helps them expand their business. The business that sold that used equipment might then be buying new equipment and perhaps doing so earlier if it was easier to sell the used equipment. Isn't this part of the economic argument for expensing? What is supposed to happen to used equipment that still works but the owner wants newer versions? Does it depend on the industry?