James de Bree: Tax professionals are our miner’s canary

Jim de Bree
Jim de Bree

Tax professionals are the ones getting involved in the trenches of tax reform. Virtually every tax professional I know has remarked about how they cannot believe this is happening.

I spoke with one of my former partners who is retiring in a few months. He lamented that this certainly is not 1986. When the 1986 Tax Reform Act was passed, it took 16 months of bipartisan debate to produce a bill that was revenue neutral.

While the bill’s supporters tout the post card tax forms, their hype belies the complexity of the new law. For example, many business owners will experience significant additional complexity computing their taxes because they will be taxed at the convoluted “pass-through” tax rates.

I spoke with an IRS official who is one of my co-instructors at the Cal State Northridge Masters of Taxation program. He expressed concerns about enforcement of several new provisions and the numerous loopholes that are created by the legislation.

My colleagues and I have prepared numerous projections for clients. Generally, the middle class gets very little and many will see their taxes increase. In the Nov. 17 edition of the Santa Clarita Gazette, Rick Drew, a CTEC Registered Tax Preparer, noted that many of his middle class clients will see substantial tax increases.

Conversely, I have seen projections for taxpayers with seven and eight figure incomes who will keep an additional 10 percent of their income, largely because of the nearly 15 percent rate reduction in the tax rate for certain pass-through investments. Corporations get a similar break.

Tax professionals are the proverbial miner’s canary, exposing this tax bill for what it is — a shift of the tax burden from the wealthy and corporations to middle class America.

The Tax Foundation, a national think tank devoted to tax policy matters, estimates that the top 1 percent of earners will see an average increase in their after-tax income of 7.5 percent. The bottom 80 percent of taxpayers will only see average increases ranging from .8 percent to 2.4 percent.

Why are the Republicans making these changes? Last week Sen. Lindsay Graham and Rep. Chris Collins of New York both stated that their donors will disappear if tax reform isn’t accomplished.

Before the House passed the bill, commercials were run locally encouraging Congressman Knight to vote for the bill. You may remember those commercials. They showed a family, with a mother holding her baby child, asking Congressman Knight to vote for a fair tax that reduces their tax burden.

If you looked closely at the bottom of the advertisement, you may have noticed that it was paid for by the American Action Network — a PAC sponsored primarily by industry trade associations representing the pharmaceutical, petroleum and insurance industries.

I have asked the CFOs of my former clients what their companies plan to do with the tax savings. The typical answer is either invest in technology (which will generally replace human labor with cyber activity) or distribute the amounts to shareholders. None of them said they plan to increase salaries – unless the marketplace requires them to do so.

The Tax Foundation estimates that tax reform will create 890,000 new jobs over the next decade and will increase wages by about 2.7 percent – or .27 percent annually – over that period.

In June 2016, House Speaker Ryan released a tax report called “A Better Way.” That report called for corporate tax rate cuts comparable to those contained in the current tax reform legislation. It also stated that incremental taxes resulting from increased economic activity would only replace about a third of the revenue loss from the tax cuts. This discussion was the justification for proposing a value added tax (“VAT”) on goods and services.

The VAT proved to be politically unpopular, so now the rhetoric is that the tax cuts will increase the GDP growth rate from 2 percent to 3 percent. A 3 percent GDP growth rate is what the U.S. economy typically experiences in good times – but generally has not seen in more than a decade.

The Tax Foundation estimates that tax reform will grow GDP by about 3.5 percent or .35 percent annually during the next decade. That means that GDP growth would not likely meet the 3 percent targeted rate solely as a result of tax reform.

All of this comes at a cost of $1.5 trillion, which will be financed through the issuance of additional government debt. I am amazed that the Republican deficit hawks who complained about the ballooning deficit during the Obama administration aren’t concerned about the lack of fiscal integrity accompanying these tax reform proposals. I should have realized that their donors want a tax cut.

The Republicans in Congress want you to drink their tax reform Kool-Aid. What they haven’t told you is that the punchbowl is contaminated and drinking the Kool-Aid will probably make you sick.

Jim de Bree is a retired CPA who has spent more than 40 years specializing in tax matters and studying tax policy.

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