The GOP’s tax proposal, crafted by Paul Ryan and Kevin Brady does not set the Trump Administration up for a legislative victory, but rather for a political disaster.
The tax bill proposes raising taxes on as many as 70 million Americans who live in high tax states while cutting taxes on corporations in a way that preserves domestic profits while not going far enough to encourage the repatriation of cash held overseas.
Recent leaks, including the Paradise Papers, reveal that Apple and other companies that have cash parked overseas pay almost zero tax on that money. While cutting the corporate rate from 35% to 20% is likely to boost profits domestically, 20% is still not zero percent. A 20% corporate tax will not present a worthwhile opportunity for companies like Apple to repatriate hundreds of billions of dollars that is parked overseas.
If an unseasoned reader was told that the GOP tax proposal was written by Bernie Sanders, they would probably believe it.
The bill raises the effective tax rates on some Americans to more than 65%. This means that if a brain surgeon in California makes $1M/year, they will take home less than $350,000 after takes. Essentially, it may make more sense for that brain surgeon to only work 6 months per year, and not make the extra money in the first place.
In California, for Individuals with $1M/year ($1.2M for couples) under the GOP Plan:
1) The Federal Income tax rate jumps to 45.6% from 39% thanks to a new “surcharge” that’s baked into the law
2) The Obamacare Tax will remain at 3.8%, as Senate Republicans have repeatedly failed to pass an Obamacare repeal
3) State Income Tax for these well-off Californians will remain 13% but will no longer be deductible against federal taxes
4) Property Tax will remain variable based on property value but will no longer be federally tax deductible, and will likely result in downside for real estate prices
5) FICA (Federal Insurance Contributions Act) will stay at 2.81%
The total tax burden for individuals making more than $1M in California will jump to at least 65.2 percent.
Those who make more than $1M in the State of California are part of a fairly small group of people, but this example reflects the type of tax increases that will be seen for about 70 million Americans who live in high tax states under the GOP plan.
Republicans are grasping to a notion that their tax reform bill will force high tax states to lower their state taxes. This notion that blue states will subsidize the public approval of their residents for a Trump Tax Bill is a notion entirely based on wild imagination. It simply will not happen.
Meanwhile, Republicans are hailing the great accomplishment of phasing out the estate tax. While the estate tax, which essentially allows the Federal Government to raid coffins, is a fundamentally immoral idea, the reality is that it makes no meaningful difference in the economy.
Trump Economic Adviser Gary Cohn infamously told a group of Senate Democrats that “Only morons pay the estate tax.” As crass as he comment was, it’s true. A living trust, which is a three-party fiduciary relationship in which the first party transfers a property upon the second party for the benefit of the third party, the beneficiary, is a legal arrangement that costs about $100 to set up. This $100 legal document allows people to avoid the estate tax altogether.
While Republicans hail the phasing out of the estate tax, there remains to be no solution to closing the carried interest loophole, which allows hedge fund and private equity managers to pay capital gains tax, rather than income tax, on the income that is generated through the capital gains on their clients’ capital. As a hedge fund manager, I’m quite happy about this. Even so, I realize that the survival of the carried interest loophole can be entirely attributed to hedge fund and private equity lobbyists, who are in the pocket of lawmakers on both sides of the aisle.
In the short-term, the GOP’s so-called “tax reform” will be able to be presented as a legislative victory for President Trump, as well as Republicans in Congress. In the long-term, when millions of Americans realize that their tax bill will be going up, rather than down, the GOP will suffer political losses the likes of which we can’t yet imagine.
The solution is simple. Republicans should forget about their current proposal, and instead, copy and paste the Bush Tax Cuts. The Bush Tax Cuts, or something similar to them, would cut taxes for all (not some) Americans and would likely receive bi-partisan support.