For MANY reasons, I am not a fan of the tax reform bill that was passed by Congress at the end of 2017. To summarize my dislike, it dramatically redistributes wealth to the top 1% in the form of income rate cuts to the top marginal brackets, a doubling of the estate tax exemption to $22.4 million, and a dramatic corporate tax cut from 35% to 21%.
Meanwhile, it blows a $2.3 trillion hole in the deficit, and when paired with massive spending increases, the annual budget deficit will likely pass $1 trillion next year (more than double just 3 years ago). It is classic “trickle down economics“, funded by a raiding of the U.S. Treasury by those who do not need it.
The bill was sold to the American public through the promise of 2 oft-repeated benefits:
- Wage growth: we’ll give corporations tax cuts and they’ll pass those on directly to workers.
- Ease of filing: this bill will make filing taxes much simpler (“Look, a postcard!”).
How has it performed on those 2 points? Let’s take a look…
Real Wages Have Declined Since Passage
The early results are in on wage growth – and its not good. The large majority of the tax savings have not gone to workers, but instead have been funneled to the corporate investor class. Companies have authorized $754 billion worth of stock buybacks so far this year, and that total is expected to surpass $1 trillion by end of year (the previous annual record was $589 billion in 2007).
Stock buybacks typically benefit investors (the most significant of which are the executives at the companies doing the buying back). 84% of corporate stock is owned by just 10% of Americans and the richest 1% own 40%. Interestingly enough, the stock market has gone up less than 5% this year as stock valuations were already approaching all time highs simply in anticipation of this bill passing.
Meanwhile, nominal wages are flat, and inflation-adjusted wages have actually declined since the bill was passed.
In other words – a few at the very top have gotten notably richer, but nobody else has seen a windfall (while the deficit has greatly expanded future debt obligations). Wage growth has just not materialized, as is the case with every prior trickle down experiment.
The “20% Passthrough Deduction” Makes Filing More Complicated
Then there’s the “simplifying the tax code” argument. While less Americans will itemize their taxes, due to a higher standard deduction, the tax code was not made any simpler otherwise. Sadly, no postcards. In fact, the new passthrough deduction significantly complicates the tax code.
With 1040 schedule C reported income from the earnings of this site, I’ve been coming up mostly empty since January when looking for more information to figure out if the income I earn will be eligible for the 20% deduction (aka the “199A deduction”) that was carved out for passthrough businesses, such as partnerships, LLCs, trusts, and S corps.
To that end, more than 7 months from the bill’s passing, the IRS has finally released 184-pages of proposed passthrough deduction regulations and interpretations. I’ve become fairly skilled at digging through IRS documentation to try to interpret the impact of changes, but this thing is a huge mess. In fact, it’s so bloated and complicated, that one has to wonder if that was the whole point. In other words, only those with significant enough resources to hire tax professionals to interpret the law will be able to claim the deduction.
It’s also clear that the new rule picks winners and losers, without justifications. For example, it explicitly excludes specified service trades or business (SSTB), which includes a trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading, dealing in certain assets or any trade or business where the principal asset is the reputation or skill of one or more of its employees. But this exception only applies if a taxpayer’s taxable income exceeds $315,000 for a married couple filing a joint return, or $157,500 for all other taxpayers.
And anyone “performing services as an employee” is completely excluded from the deduction.
Economists estimate that nearly 70% of pass-through income flows to the top 1% of American earners and the Congressional Joint Committee on Taxation estimates that this deduction will primarily benefit those earning $1 million plus. This deduction is a further raiding of the Treasury to benefit the wealthiest among us.
Whether I get the deduction or not, this deduction and the broader bill is clearly taking us in the wrong direction. It creates massive loopholes and windfalls for passive income earners. Nobody who relies heavily on W2 income should be happy about this. And all of this could have been prevented if those passing tax legislation would have directed all of the tax cuts right to those who need it the most and would have injected most of it right back into the economy – the working class.
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You can provide us with lots of information and facts but it seems that does not matter in the current political climate. We deserve the government we have as long as we don’t care about facts. The collaboration of nations has brought about the greatest benefit to the greatest number of people on earth and the U.S. was part of that success. Watch for the declines now that nationalism (isolationism) is the driving force. Those who do not learn from history are doomed to repeat it.
Well said reply and great, on-point article. Now, if only people would care about the facts like Gail said and stop this left vs right political crap.
I, too, believe we are bound to repeat history as the most ignorant voices in our country are the loudest. Problem is, there’s no changing their minds no matter what.
You’ll notice I deliberately avoided left, right, or naming culprits and just focused on the real impact here.
I do think that as bleak as our relationship with facts and data is, those in positions to analyze it, make sense of it, and share it are bound to do so. If not, then where are we?
True, but the tax bill was passed by a Republican Congress, and signed into law by a Republican president. All Democrats opposed it, and the only bipartisanship was in a handful of Republicans joining the Democrats in opposition (though to be fair, the converse was true of The Affordable Care Act).
Yes, the facts are the facts. But as Gail and Aaron pointed out, these facts could easily be seen as an attack on the right since by and large the right supported the tax bill and the left did not. This could be further exacerbated by the fact that right-wing media like Fox News will likely never report on any negatives of this bill. We’re increasingly becoming a country where you’re either liberal or conservative with absolutely no middle ground, and it’s horrifying.
The biggest giveaway to the banking sector, was the Bush-Obama bailout of the criminal banking class that finally torched the last shreds of US financial credibility back in 2008-2009. The Democrats had their chance but they ignored the public’s near-unanimous opposition to bailing out Wall Street. And, to put the icing atop of the cake–Obama and the Congress passed the ACA or “Romneycare”–which allowed prices in the healthcare sector to explode without intervention. And the average consumer’s debt has skyrocketed, with personal bankruptcies largely due to medical debt.
In short, the tax cuts are not even a drop in the bucket of the financial malfeasance of the two-party system. Even if the US cut its ENTIRE military budget–it would not bring down the (at least) $21 trillion dollar US debt appreciably. So I don’t see where a mere tax cut will make any difference in the long run–either pro or con. When the Democrats had a chance to declare a “Jubilee” for the average US household–they gave it to the banks, instead. Now, Obama gets $400,000 a pop for speeches before Wall Street entities. A payoff for a job well-done!
I’m not a Democrat and I thought the 2017 tax reform bill was a bad idea! The politicians sold this as a benefit for lower and middle classes, but why would politicians advocate something that didn’t benefit them? Sure, distract the middle class with the small income tax reductions and bonus checks for Walmart, etc employees. Meanwhile the top 1-5% are the real winners.
The problem is Wall Street and Washington have become one in the same. If you can make the rules you can make a fortune.
Great article. My sentiments exactly.
Whether or not you’re for the tax cut, the 20% deduction was created to allow LLC’s et al to compete with C Corps. Since the corporate tax rate was cut, this would have given an advantage to C Corps compared to other types of businesses. Thus, the deduction was created to keep other forms of corporations competitive. If you have an issue, it should be with the corporate tax rate cut, not the 2o% deduction for passthroughs. I run my own LLC, so I’m appreciative of the fact that they kept the little businesses in mind when coming up with this legislation. I don’t think most people understand the difficulty and risk involved in going into business for yourself, especially when in competition with more established corporations. No social safety net for us, just Wall Street. Without the 20% deduction, we would have prevented future entrepreneurs from rolling the dice and entering the market.
I would agree with your sentiment if a few things were true:
1. There weren’t massive loopholes for larger corporations and larger income earners to take advantage.
2. It didn’t pick winners and losers.
3. It was much more clear what is going on.
4. It didn’t value passive income from things like REIT’s the same way as actual work done.
Whatever. It’s saving me a few grand a year in Fed income tax. Obama exploded the deficit without cutting my taxes. At least this way I get a tax cut. Exploding stock prices under both Obama and Trump have also benefitted me greatly.
Federal tax cuts will never benefit the bottom half because they pay zero net fed income tax anyway. So at least half the audience will always be moaning someone else got something they didn’t even when they’re getting a free ride. Then you got the pikers who pay a whopping $2K in FIT and get $200 knocked off their taxes that gripe that the guy paying $20,000 got $2,000 off.