I happen to support tax simplification that does not increase regressivity of the tax system, and I recognize that there are a few parts of the Trump tax change that do that. But mostly it massively increases regressivity, along with massively increasing the budget deficit at a time when we are not too far from full employment. As it is, however, the new tax law turns out to be riddled with all kinds of ridiculous unintended consequences that complicate the tax code absurdly and that in some cases were not meant to be put in and are creating major problems for certain groups of people. One that is reportedly hurting especially are farmers, and GOPs in Congress now want to fix some of these blunders. Of course much of this is due to their super hurry to get the bill passed without proper hearings and vetting that obviously were called for in the case of such a massive change in our tax laws. We are going to be discovering these gliltches for some time to come.
There was an article in yesterday’ Washington Post (“Tax ‘planning frenzy’: The hunt for loopholes,” by Jeff Stein) noting some of the nonsense that is going on, especially regarding professionals. Stein says that “doctors are going berserk” and they are the ones especially caught up in the “tax planning frenzy.” To give some idea of what is going on I shall simply quote the opening paragraph of the article, which provides further details.
Of course there is no simplification, none was ever intended.
Meanwhile, I would think these guys should get a medical opinion on possible whiplash, but maybe since they do the same thing on an 8 year cycle they have gotten used to it.
“It is a foundational belief of Republican Party doctrine that tax cuts cannot have any adverse impact on the national debt. Indeed, Republicans have invented a new language in which budget deficit does not actually mean the difference between revenue and outlay at all. It is a term used exclusively to express panic over social spending.
Economists and intellectuals associated with the party are therefore required to, in essence, keep two different sets of books when discussing fiscal policy in public. In November, a group of Republican luminaries, including Michael J. Boskin, John H. Cochrane, John F. Cogan, George P. Shultz, and John B. Taylor co-authored an op-ed cheering on the Trump tax cuts. Isn’t it a little dangerous to permanently increase the deficit, especially during the peak of an economic expansion? Nonsense, they argued. The effect on interest rates of higher debt “is likely to be modest, given that the United States operates in an international capital market, which means that the impact of changes in interest rates resulting from greater investment demand and government borrowing are likely to be relatively small.” No need to worry your pretty little heads about interest rates, since international capital markets will supply as many buyers of Treasury bills as needed, forever. Party on!
Now that the Trump tax cuts have passed, though, they have pivoted to a message of deep concern about rising debt. Boskin, Cochrane, Cogan, Shultz, and John B. Taylor have written another op-ed. It applauds the tax cuts and calls for more. Yet it warns that the failure to cut social spending will lead to catastrophe. Including higher interest rates:
In recent months, we have seen an inevitable rise in interest rates from their low levels of recent years. Rising interest rates and increasing deficits threaten to build upon each other to send public debt spiraling upward even faster. When treasury debt holders start to doubt our government’s ability to repay, or to attract future lenders, they will demand higher interest rates to compensate for the risk. If current spending and tax policy continue unaltered, higher interest costs will have to be financed by even more debt. More borrowing puts more upward pressure on interest rates, and the spiral continues.
If, for example, interest rates were to rise to 5 percent, instead of the Trump administration’s prediction of just under 3.5 percent, the interest cost alone on the projected $20 trillion of public debt would total $1 trillion per year. More than half of all personal income taxes would be needed to pay bondholders.
Those international capital markets, which ensured us of low interest rates forever even with the higher deficits that would follow the Trump tax cuts, have somehow disappeared. In their place is a new world where suddenly interest rates may spike catastrophically with no warning. Immutable laws of economics have suddenly reversed themselves. Until it’s time for the next tax cut, when they will reverse themselves again.”
http://nymag.com/daily/intelligencer/2018/03/conservative-economists-turning-back-to-debt-hysteria.html
My only disagreement is the claim that there is no tax simplification in the new law. There are some elements that do simplify, although many fewer than were initially proposed, and I think in the end the net result has been greater complication, and beyond just all this confusion over what has changed in the tax code. I note that Dean Baker agrees with me on this.
Probably the most notable simplification, which also happens to be probably the main benefit for middle income taxpayers of the whole thing, is the doubling of the standard deduction. This will lead to many people not having to go through itemizing deductions, which is a time consuming pain the you know what. This is indeed both something genuinely simplifying and worth supporting. There are a few other such items, but they are far less important than this one, and they are easily offset by the numerous new complications.
Of course, as said in my post, the main overall effect of the law is to substantially redistribute income upwards and to sharply increase the budget deficit at a time this is not so wise. It is funny that the GOP is disappointed that their law has not led to an increase in their popularity. But the cuts for the vast majority simply amount to too little, not to mention that apparently excessive withholding is going on so that many people will find themselves owing money next spring who will not be expecting that, although that has been timed to be after the fall election. But the GOP is just not getting any boost from this besides that. (and Dean Baker has documented at best very small increases in capital investment from it, the supposed benefit for overall economic growth).
When the GOP says “tax simplification” they usually mean having fewer income brackets by getting rid of the highest ones.
But I don’t think that you can regard accountants looking for new loopholes BECAUSE THEIR OLD ONES ARE GONE as some sort of proof that the tax code has not been simplified. At some level the “looking for immediate guidance” is due to a lack of case-law. Because no matter what the IRS tells you the law means, it is actually the courts that, in the end decide.
Of course most of the tax cuts were exactly wrong and while the GOP will get the big money donors for the midterms and may even avoid economic disaster that long, I do not see the house of cards holding together through 2020. Does anyone think Trump can be persuaded like Reagan in 1986 to raise taxes? My GOP friends used to chide me about the Obama era deficits suggesting that Keynes did not argue for continued deficits. With extremely low unemployment, if the government is not going to run a surplus now when will it? The small tax cut given to lower income taxpayers would have been the perfect time to modestly increase social security and medicare taxes to reinforce the trust funds and reduce the deficit under the uniform budget, the upper income brackets should have been modestly increased to reduce the impact of lowering corporate rates, the corporate tax cut should have been smaller and the absolute dumbest thing came from most probably the dumbest Senator who ever lived Ron Johnson of Wisconsin who lowered the rates on pass through entities. The whole reason there are pass through entities is to avoid double taxation and Johnson’s rationale was utterly absurd, but that is what is leading all kinds of people to explore turning personal income into LLC or subchapter S income because now you can get a lower rate on your earnings not just avoid double taxation. But hey Trump and the GOP in general love the uneducated and the selfish.
As an accountant, I feel obliged to point out that a lot (most) of the firms people associate with taxes are law firms, not accounting firms. In particular H&R Block. HRB is affiliated with an accounting firm (RSM), but the accounting firm is not really in the driver’s seat.
Within the consulting services branches of the entities that people recognize as “accountants” the same is true. Lots of lawyers, not as many CPAs.
I’m also a little surprised to hear that optometrists in the south want to spin off the glasses shops, because it’s mostly been that way here for as long as I can remember.
I get that the increase in the standard deduction may simplify some middle income returns, but not a whole lot.
At that income level what kind of deductions are we talking about? State and local taxes? Mortgage interest? Not a whole lot of tax deductions apply to middle income people at all. And quite frankly,, people will have to run the numbers on standard and itemized to see which is better.
So the simplification is just a matter of what you enter on your return, still have to do the work.
No more exemptions, so that’s a few less lines on the form.
Schedule A will have some reduction in lines because of no more
Miscellaneous itemized deductions subject to the 2-percent floor
Employee business expenses
Tax preparation fees
Investment interest expenses
Personal casualty and theft losses (except for certain losses in certain federally declared disaster areas)
On the 1040, line 11, line 35, line 31a, line 34 and form 8917 and 8903.
AMT for individuals is adjusted, but it probably won’t impact whether you do the worksheet or not.
Maybe they replace the 20 pages of tax tables with a waterfall worksheet (which would probably increase tax calculation errors for paper filers…).