The Senate and the House of Representatives, both controlled by the GOP, will begin work Monday on reconciling the differences between each of their attempts to rewrite the U.S. tax code. The GOP and Trump have been desperate to get something, anything passed to avoid the embarrassment of being unable to get things done despite controlling Congress and the White House.
But in trying to get anything passed, the GOP has created a mess of a tax bill which will satisfy only a small percentage of the American people and is based on unrealistic expectations. And for accountants, many of the strategies which we use to preserve our clients’ wealth could be upended. We will also face greater uncertainty due to the temporary nature of much of these provisions.
There is a great deal of fury surrounding this legislation, but anger makes it hard to sit down and figure out the situation. A calm and dispassionate perspective is needed to make clear just how problematic this tax bill is for accountants and their clients.
Tax Cuts and Economic Growth
For over 30 years, the GOP has argued that by cutting taxes, the tax cuts would pay for themselves by jumpstarting the American economy. Corporations will have more money, which they will use to hire workers, raise wages, become more productive, and eventually pay additional taxes to the government.
But while the Laffer curve theory may have been valid in the past, it is no longer relevant. As President Trump loves to point out, the U.S. economy is currently doing well and at full employment, which belies the claim that they will hire additional workers. Most large businesses will likely use the additional money to improve dividends or buy back stocks instead of raising wages.
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According to CBS, a report from the Joint Committee on Taxation found that the tax bill will increase the deficit by $1 trillion, but more importantly would only improve growth by 0.8 percent over the next decade, or only 0.08 percent per year.
Temporary Tax Cuts
Given how much the Republican Party has talked of the need to bring down the deficit, do they have any real plan to raise the necessary revenue? The GOP’s answer is to make tax cuts for individuals temporary while permanently lowering the corporate tax rate from 35 to 20 percent. Despite Donald Trump’s supposed advocacy for the average American, many of them will see their taxes go up to pay for the lower corporate tax. Higher taxes will not happen this year nor the next, but will appear at some point over the next decade.
From a political perspective, the GOP’s plan is rather clever. They can reap the short-term gains of tax cuts, which are always popular. And should the Democratic Party be in power when the taxes begin to rise because of this plan, the GOP can argue that “tax and spend” Democrats are responsible. But from a financial and accounting perspective, the result is legislation which hurts the average American at the expense of the wealthy.
The tax plan has been criticized for the temporary cuts, but ordinary Americans could also be hurt by how it removes several major deductions. These include deductions for student loan interest and tax tuition waivers for graduate students, and Axios reveals smaller, weirder deductions or exemptions which were placed in the legislation at the last minute.
It remains to be seen whether all of these deductions will absolutely stay in place. Many of these deductions help small businesses by allowing them to claim tax back on expensive equipment such as the best laptop with touch screen functionality. An earlier House GOP tax plan had eliminated a tax credit for adoption, only to put it back in after outcry from social conservatives. But for accountants, we will have to develop new tax planning strategies.
In particular, we will have to look at the taxation details surrounding pass-through entities, which could provide us an opportunity to reduce our clients’ tax burden. Those in higher-tax states will have to figure out how their clients will be affected by a likely reduction if not elimination of the state and local tax deduction. These are but a few examples, which entails additional work and analysis while many Americans lose certain valuable deductions.
Change, but not good change
It should be noted, even at this stage, that the GOP tax bill is not a sure thing. They will have to reconcile the differences between the two bills and then vote on the new bill, and the Washington Post notes that there are some major differences such as the estate tax and the permanency of individual tax cuts.
But the two groups do agree on basic common principles such as the desire for a lower corporate rate regardless of the consequences. This tax bill will likely pass in some format, and practically everyone aside from major corporations and upper-income individuals will lose out over the long run. The elimination of key deductions, the temporary nature of individual tax cuts, and its effect on the federal deficit will have serious, negative effects on the American economy. Many accountants will be harder pressed to make sure their clients keep more of their money over the long term.
Gary Eastwood is a CPA licensed senior accountant from Seattle, Washington. He received his CPA license from the Washington State Board of Accountancy in 2001 before relocating to Onawa, Iowa in 2008. Over more than 15 years of accounting experience, Gary has worked with multinational health service providers and independent CPA firms. He has a proven ability in dealing with business clients from a variety of backgrounds as well as leading companies to greater efficiency and profitability. He is familiar with both US GAAP and China GAAP.