April 30, 2017
Trump Tax Plan: Less than Half a Page Long and Very Short on Details
Dear Clients & Friends,
Our assessment of Trump’s tax plan is fairly straightforward because, unexpectedly, the “comprehensive and sweeping” tax reform is only 250 words. Although the news rightfully reports that the plan is only one page, it’s actually less than half of one page if you don’t use extra-large font, double spacing, and endless bullets to separate sentences. I’ve taken the liberty to reformat the letter given to the White House Press Core using Microsoft Word’s default font size. As you can see below in the screenshot of a standard size sheet of paper, this tax reform has fewer characters than my average supermarket receipt.
It’s also important to note that only 50 words have any “plans” because the majority of this short letter says things like “Provide tax relief” and “Simplify the tax code.” Yes, those two items are important, but lack any kind of detail or thought. Only 7 sentences worth 50 words have any detail, whereas my email signature is 69 words. Before we get into the detail, let us also note that the Trump family stands to save tens of millions of dollars per year with this proposal. There are a few good ideas in this package, so let’s get into the little detail that we have.
This new plan does simplify the tax code significantly by reducing the number of tax brackets from seven to three and removing a mountain of various personal tax deductions, while protecting the mortgage deduction, charitable deduction, and retirement savings deduction. Also, doubling the standard deduction would be a nice benefit to many Americans. However, the effect is dramatically over-stated by the White House. From our calculations, using mean household income levels, a family of four would save $1,830. If the same family owned a home with a mortgage, they would likely save $0.
This new plan seems to reduce personal income tax levels (for example, the highest bracket will be reduced from 39.6% to 35%). However, this plan does not illustrate what income levels define each tax bracket. Therefore, anyone could wind up in a bracket that is actually higher than the bracket that they were formerly exposed to. In addition, because so many personal tax exemptions and deductions are being removed, even if your bracket is lower, if you lose too many deductions, you may be paying more taxes.
The big elephant in the room is whispering, “What about the rich versus the poor?” The three big ideas in this proposal do in fact have the potential to reduce certain people’s tax obligations dramatically. And when I say dramatically, we’re talking about a tax reduction for some ultra-wealthy Americans of up to 60%. Concurrently, a Kindercare pre-school teacher filing for themselves will see no tax relief of any kind whatsoever (calculated using the Glassdoor salary databases).
In this proposal is the elimination of the estate tax, which only affects married couples worth almost $11 million. While the federal estate tax does affect many clients here at MORWM, all of our family of clientele that are exposed to this liability recognize that this change has no effect on middle-income America. We placed this proposed change in the “Questionable” section because it really depends on one’s focal point. If we examine benefits as it pertains to specific individuals, these changes may be very welcome. If the lens through which you look includes America as a whole, one’s evaluation may be much different. Key note: according to Donald Trump’s claimed net worth, the repeal of the federal estate tax will save his family $900 million dollars.
The elimination of the Alternative Minimum Tax is a tough one to calculate. The AMT is a minimum tax calculation that the wealthiest Americans must calculate to be sure that they do not take so many deductions that they pay no taxes at all. If your “regular” tax calculation is lower than the “minimum” tax calculation, you have to pay the minimum tax. According to Trumps 2005 tax return, the elimination of the AMT would have saved him $31 million in that year alone. On the other hand, if there will be wide spread elimination of most tax deductions, the alternative calculation may be rendered unnecessary anyhow. Therefore, we’ll keep this item in the questionable column.
The final questionable benefit is the repatriation of foreign assets. Trump is proposing a one-time “special opportunity” to bring cash back to America with a low one-time tax rate. Although there are no formal details, given his prior speeches, experts assume a rate between 8.75% and 10%. This could encourage the return of trillions of dollars back home into our domestic economy. However, it’s another benefit for the ultra-wealthy and large corporations with no immediate effect on Middle America at all.
First and foremost, we really have no way to tell if this proposal will actually save American taxpayers any money. Yes, you may be in a lower tax bracket, but you may lose all of your tax deductions. Yes, the brackets have been reduced, but we don’t know what bracket anyone will fall into. What we do know is the following: due to the massive tax reductions on the wealthiest 1% of Americans, according to the New York Times, this proposal will cost the United States of America $5.5 trillion dollars. It’s hard to believe that, while many politicians have been criticizing the amount of our national debt, they will allow said debt to increase almost 30% in one sweep.
The other disadvantage is not so much a negative attribute of this plan, but rather something that I personally consider to be a misunderstanding of “Trickle Down Economics,” a theory which claims that financial benefits for the rich trickle down to everyone else due to an expected increase in economic activity. For example, supporters of the trickle-down theory claim that tax benefits for the rich will cause the rich to spend more, and that will create jobs. This is not among the laws of economics we study. Rather this is a made-up idea used to promote certain tax-related agendas, which is why many experts have been referring to this theory as “voodoo” economics for more than a century. To steal a Trump word, this is “fake” economics, and here’s why: if a family of four with a household income of $100,000 saves $2,000 in taxes, this extra money will be most likely be spent on clothing, medical bills, school supplies, or even a vacation. All of these activities enrich the economy. On the other hand, statistics show that if someone like the CEO of JP Morgan, whose compensation is $30 million per year, saves money in taxes, he will not spend more money because he can already buy anything that he wants. Rather, this type of individual will simply add this savings to their investment portfolio, which does indeed have the ability to push the stock market up. But again, this has no real effect on the economy, nor does it provide any relief for middle and low-income Americans. In reality, tax benefits for the middle class directly benefit them, and also stimulate the economy. Considering that most ultra-wealthy and successful Americans business owners provide services or products to the middle class, it’s very shortsighted to not want to help them out.
All tax reductions for the wealthy are fundamentally predicated on the idea that the trickle-down effect is real. In fact, the phrase “Trickle Down Economics” was coined by a humorist named Will Rogers, not an economist. And this nonsense is not exclusive to a particular political party or nationality. In New Zealand, Labour Party MP Damien O'Connor has, in the Labour Party campaign launch video for the 2011 general election, called trickle-down economics "the rich pissing on the poor.” In the spirit of full disclosure, we know that a rising stock market does create something called the “wealth effect.” This happens when people who invest in the stock market feel more wealthy when the markets are up, and therefore spend more money. Tax breaks for the rich, as mentioned above, can cause this to happen. So, in a very indirect way, there is an extremely small link that supports a very slight version of the trickle-down theory. However, the link is so small that, following a study of 12 developed countries, Harvard University Professor Christopher Jenks concluded that this trend would take 40 years to cause a 5% increase in compensation for middle income earners. As a result, Jenks, says “It’s like giving people aspirin when they have cancer. It might make them feel a little better, but it’s not going to cure them.”
Trickle Down Economics isn’t real. I think it’s important to remember this when assessing any President’s tax-related agenda. There are 3 things to consider when looking at Trump’s tax reform: 1) Will this tax plan help me and do I need the help, 2) Will it help the average American and does the average American need help, 3) How do you, the reader, prioritize #1 and #2?
I wish you all a wonderful weekend.
Matthew Ramer, AIF® Principal, Financial Advisor MOR Wealth Management, LLC
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