Adding Context to the Tax Reform Headlines
I have become frustrated with the headlines from the Media, whether they be the news media or blog writers, because they are written more to illicit an emotional response than to educate the public on problems and possible solutions. Tax reform is a means to drive more growth in the US Economy. And with 90% of the businesses in the US being pass-through entity businesses, it is important to understand how that affects their tax filing.
So, as it relates to my area of expertise, I want to add context to the Tax Reform conversation. By adding this context I hope it will help you make a more informed choice. And to be clear, I’m not interested in how you choose to decide. I am not interested in swaying your “political” opinion. I just want us all to be more thoughtful consumers. By doing that I think we are able to make better decisions, because we are more likely to understand the outcomes we should expect. So let’s get to it.
If we are to solve many of the problems in the US, like low wage growth, too much Debt, and improve opportunities at all levels; we need GROWTH. That restated means we need the economy to expand. More Jobs with Better Pay. Here is how Tax Reform, as proposed currently, could help with that.
Tax reform is a hot topic for the media right now. But unfortunately, this is an area that most Americans really don’t quite understand. See the article:
“Americans Get an F on Income Tax” http://www.marketwatch.com/story/americans-get-an-f-in-income-tax-quiz-2015-02-24
That is why you should have a Financial Planner that can help you with Income Tax Planning techniques. We act like a tutor in this area, and combined with a collaborative Tax Professional, we are a dynamic team looking out for your financial future.
Here is a recent article that has come out related to Tax Reform: http://money.cnn.com/2016/04/13/pf/taxes/gao-corporate-taxes/, and here is the headline:
Nearly 20% of large U.S. corporations that reported a profit on their financial statements in 2012 ended up paying exactly nothing in U.S. corporate income taxes.
As in zero, zilch, zip, nada.
I don’t know about you, but when I read this headline I get mad. I think as a percentage of my total income–paying 28-33% in taxes is an awful lot. Then you add in state taxes, and I get even hotter. Here is why so many Americans feel that way:
So clearly it isn’t that tax receipts are too low…I think just as every business has been changed by technology, and in many cases, made more efficient, state and federal governments could use a bit of revamping too.
But back to those companies–why do they get a free ride?! Or do they? Most businesses are what we call pass through entities. They don’t get taxed at the corporate level; they get taxed at the personal level. In fact, “Over 90 percent of businesses in the United States are pass-through businesses, whose income is reported on the business owners’ tax returns and is taxed under the individual income tax. These businesses earn the majority of all business income in the U.S. and employ over half of the private-sector workforce in 49 out of 50 states.” (Tax Foundation, https://taxfoundation.org/pass-through-businesses-data-and-policy). Therefore, what CNN is stating, while designed to outrage, is simply explained by the companies’ formation. That explains why Americans will pay more in taxes than food, clothing and housing combined.
But do the “rich” pay their fair share? I guess that depends on who you call “rich.” When the media is referring to the top 20% of income earners, did you know that could very well be you? That’s right! If your household made over $111,000.00, then you too are in the top 20% of income earners. You see, the top 20% of income earners in the United States are discussed in this piece by NPR: http://www.npr.org/sections/money/2014/05/05/308380342/most-americans-make-it-to-the-top-20-percent-at-least-for-a-while.
Here is the headline:
Most Americans Make It To The Top 20 Percent (At Least For A While)
From the article:
Here’s another headline from the Washington Post:
Why Thousands of Millionaires Don’t Pay Federal Income Taxes
And the article:
Really? That seems to fly in the face of what NPR just said. Here is where the understanding of the way a business files its taxes comes into play. In 2008-2009, most businesses did not make much in profits. That can be seen in the earning data here:
Now let’s remember that 80% of businesses are pass-through entities that get taxed on the owner’s personal return. When you don’t make income, you can’t take the deduction of your losses. Most people don’t qualify to get money from the government on their taxes. So those losses get suspended on your tax return. When profits began to return in 2010, those profits can be offset by the losses you had in prior years, but couldn’t take because of the low income. So, 2010 likely would have had nearly 80% of businesses with low income tax. Again, in 2011, you would have had many businesses with no or negative earnings, so in 2012, if they made income, those suspended losses would have been taken. The article above from CNN was written in 2012. So, some cherry-picking of history is at play here.
The real answer is tax reform is hard, but it helps everyone.
There are two ways to look at how to model the tax changes:
1) Static, with no changes to the underlying economy; and
2) Dynamic models, which bring in the assumptions for what tax reform would do for economic growth. For those in the 20-40% income group, this helps them lift incomes by an estimated 11.6% vs. those in the 80-100% bracket being helped by 11.3%. So yes, it helps everyone, and those with lower incomes are likely to be helped a bit more.
I hope you can see my frustration, and understand why I am advocating for us not just to read the headlines and allow our emotions to overrule our reason. We must stop and think of the context of the headlines, get all the facts, and keep things in perspective. That is, by the way, good investment advice as well!
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