Will tax reform work for you
By Fred Meyer
Nov 16, 2017
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There has been much discussion about tax reform. There are really two different areas of tax reform: federal taxes, and state/local taxes. Since President Trump has asked Congress to work on tax reform letís talk about federal tax reform now. So how will changes to federal taxes affect you? Will tax reform raise or lower your taxes? The answer depends on what kind of income you have.

All of the discussion in Washington is about income tax reform, both individual and corporate income taxes. We really need to discuss other kinds of taxes such as the value added tax. It would make American made goods a little more competitive if done right. Letís talk about your taxes now.

If you worked for your income, you likely pay individual income tax. You pay this on all of your income minus your exemptions and deductions. So how much are your exemptions and deductions. Do they cover your basic cost of living: housing, food, clothing, child care, health care, transportaton, and education. No they donít.

When you calculate your taxes, you start by calculating your income. If you work, donít own a business, and do not have investment income, your income is basically what you earned. There are some adjustments like moving expense or your expense as an educator (if you are an educator). After subtracting these adjustments you get your adjusted gross income. If you are just a working person your adjusted gross income is just below your earnings.

Now we get to your personal exemptions. Last year it amounted to $4050 multiplied by the number of people in your family. So for a family of five (two parents and three children), your personal exemptions add up to $20, 250. Does that cover your cost of living. No!

Next come your deductions. This should help cover your cost of living shouldnít it? No. For a married couple filing jointly the standard deduction is $12,600. Adding this to your personal exemptions for a family of five gives you $32, 850. Does this cover your minimum cost of living. No. In Grayson county the minimum cost of living for this family of five is $66,803. 

Two adults working full time at the minimum wage will earn $30,160 a year. To cover this minimum cost of living, each parent would have to earn more than $16/hour or their combined income would have to be more than $32/hour. So two minimum wage adults with three children wonít pay income tax under my proposal. But they wonít live in dignity either. They wonít be able to cover their minimum cost of living. They will either not have the money for health care, a car or truck for transportation, child care or they will live in a very small house.

The proposed bill in the federal House of Representatives doubles the deductable, but eliminates the exemptionsiv. So the family of five will pay taxes on any income above $24000. That is less than the $32, 850 exemptions plus deductibles under the current tax system.

So how can personal income taxes be reduced fairly. First increase the personal exemption or the standard deduction so that it covers the minimum cost of living. For a family of five in Grayson county, make it at least $66, 803. Whatever the size of youf family, your exemptions plus the standard deductable should cover your minimum cost of living.

There are more tax reforms that need to be made. Beyond the deductible there are the issues of the tax rate and what counts as income. Why should the tax rate on income from investments be any lower than the tax rate on earned income. It should not. Income is income. The deductibles and rates should be the same for all kinds of income.

The House tax reform bill will raise the rates from 10% to 12% on earned income up to $19,050. So the poorest will get a tax rate increase. The tax rate will also be 12% on income up to $90,000. For people with a taxable income (after deductions) less than $90,000 there will be a tax rate reduction from 15% to 12%. For people earning between $90,000 and $260,000 the tax rate will be 25%. Those earning more than $156,000 will get a tax rate reduction. Do you earn more than $156,000? The highest rate for those ďearningĒ more than $1,000,000 will pay the same tax rate of 39.6% as they do now. Anyone with an income above $1,000,000 is earning much more than the minimum cost of living and can afford to pay 39.6%.

Businesses want to be treated like people under the law. They should pay taxes like people. The same principal, that income is income, could be applied to business income tax. Currently corporations only pay income tax on their profits, not their total income. We need a business deductable that is something like the minimum cost of living for corporations, that is a minimum cost of doing business. This could include reasonable cost of materials, wages, employee benefits, equipment, research, development, sales, environmental protection, insurance, and corporate housing (factories, warehouses, sales buildings, and headquartes). A minimum cost of doing business should not include excessive management costs. I am talking about chief management officer (CEO, CFO, CTO, Ö) salaries and other compensation (stock options) above $1,000,000/year. It should also not include excessive transportation costs (private jets, first class seats on commercial airlines, luxury company cars, Ö) It should also not include the cost of product liability judgements and product recalls. So corporations would pay taxes their profits and on their frivolous and/or excessive expenses.

Finally there is the issue of corporate tax rates. It is also difficult to understand why corporate tax rates should be different than individual tax rates. After all corporations want to be treated as people in the eyes of the law. Should a corporation with $1 billion income pay a lower tax than an individual with $1 billion income from investments? No, their tax rates should be the same. The proposal in the Houseiv is for businesses to pay a 20% tax rate. That is below the tax rate of people earning more than $90,000 a year. Is this fair? No!

One advantage of this tax reform proposal is that it eliminates loopholes. Hedge funds would no longer have the carried interest tax advantage. So it reduces loopholes and broadens the application of taxes. If this is all done in a totally revenue neutral way, it is likely that tax rates could decline. Importantly it could reduce the tax rate on earned income. Working people need a tax rate reduction.

Reducing taxes on working people stimulates the economy more than reducing taxes on people with incomes above a million dollars. Working people spend the money from reduced taxes immediately buying things to improve their lives. This increased demand causes more people to be hired. People like sales people, transportantion workers, service workers, and manufacturing workers. Cutting taxes on working people creates new jobs.

When a personís income is above a few million dollars, it is hard to spend all money from tax reduction on goods and services. They will buy some luxery items. They will invest most of their tax reduction in the market. Some of this money in the market will go to new plant and equipment. Most of it will increase stock prices. In other words it goes to speculation. It does not all go to creating more jobs. That is what happened during the George W. Bush administration. Trickle down does not work.
Some people in the House and Senate believe that all the tax savings will be used to create jobs. They must be smoking whacky tabaccy. That may be legal in Washington DC but it is not legal in Texas.

I wish this was the only federal tax issue that needs to be addressed. But it is not. There is also the issue of a value added tax. In other countries, including Canada and Mexico, the value added tax applies to imports. In many countries the value added tax is around 15%. Since imported goods pay the same tax as domesticly produced goods, domestic goods are more competitive.

Countries with a value added tax now can say that they are not charging tariffs and still make their own products more competitive. They say they have free trade, when they really fair trade. We certainly need to make American made goods to be more competitive. 

We need a value added tax, but it must be done in a revenue neutral way. A value added tax is like a sales tax. It is easy to calculate how much value added tax you pay when all your income goes for good and services you bought for your family. The value added tax could be reimbursed for low income people and corporations. That is people earning less than the minimum cost of living and companies earning less than the minimum cost doing business.

A good way to rebate value added tax to people who earn less than their minimum cost of living is to have the employer include the rebates in their pay checks. The employer can recover the rebates when he pays taxes at the end of each quarter.

These two tax reforms would make the tax system simpler, more fair,  and would spread taxes to more individuals and companies. I would like to see them implemented.

If President Trump is serious about helping working people with their taxes, he should ask Congress to implemnt this.