Readers, I can’t begin to tell you what a great year 2017 has been, even with all of its challenges from natural disasters. I sincerely wish you a Merry Christmas and a Prosperous New Year. The country has a great deal to look forward to in 2018, and so do you!
This will be our last shoot the shit for 2017 and I’d like to talk with you about President Trump’s tax legislation; because, it is widely misrepresented by a media and political party that are utterly clueless.
The Presidents economic strategy is a three legged stool. One leg addresses needless regulations(work in progress), the second leg is tax policy (done) and the third leg is the renegotiation of trade agreements (work in progress). All of these are Trump priorities for the economy. Let’s talk tax policy.
You’ve undoubtedly heard allegations that the new tax legislation only benefits the rich, this is a half-truth, but right off the bat I’d like to find out how many of you are employed or have been employed by poor people? I’ve never been! So, I want the rich to do well, and to be incentivized to start new businesses or expand existing businesses.
So, what are the goals of the new tax legislation?
There are several important components. First it lowers the marginal tax rate for businesses to 21%; this alone will add to a company’s after tax revenues and you’ve already seen what it did for the stock market; however, this rate reduction benefits privately held corporations equally well. The second component of the new business tax policy is a provision that allows capital investment to be deducted, dollar for dollar, from current period revenues. Here’s the effect of just that provision.
Widgets Inc. wants to reduce production costs and increase its output of widgets. They determine that the new Turbo Widget Machines will allow them to reduce production costs and produce a greater number of widgets per production run. The Turbo Widget Machine costs $200,000 and under the new tax legislation, Widgets Inc. can deduct the entire $200,000 from its current period income. This creates a huge incentive for businesses to make plant and equipment investments.
Widgets Inc’s decision to purchase a Turbo Widget Machine results in a order being placed with Turbo Widget Inc., the machine’s manufacturer. They in turn buy parts, possibly upgrade their own plant equipment and hire production personnel to fill the new orders booked. This effect is compounded across the national economy adding to GDP, employment and individual incomes.
Last but not least, the tax plan reduces individual tax rates and increases standard deductions. This means more money in the hands of individuals to drive consumption.
So what’s the beef? State and local tax deductibility has been limited to $10,000 and that means that higher income individuals living in states with high state and local taxes may not be able to deduct the full amount of those taxes on their federal returns. So, let’s talk about this just a little.
Of the 41 states that impose a tax on earned income, only six allow taxpayers to deduct their federal income taxes. Those states are Alabama, Iowa, Missouri, Louisiana, Montana and Oregon. So, why should the federal government allow state and local tax deductions?
What typically happens when there is a substantial federal tax reduction, states will look to increase their taxes. This removes money from the hands of the taxpayer and has a deleterious effect on discretionary spending and consumption. Bottom line, it cancels out the effect of the federal tax reduction.
So, don’t believe too much of the stuff you hear in the media, 2018 will be a great year for individuals and businesses with the only risk being an unlikely broad economic downturn in the EU.
Like all shoot the shits, you’re invited to participate. Feel free to make any unsupported comment, use uncensored profanity, insult anyone you wish or change the subject altogether.
Have a Merry Christmas and Prosperous New Year!