Pros and Cons of the Trump Tax Plan – Ep. 287

Estate Tax is Out

Today President Trump announced some of the details of his highly-anticipated tax reform, which is really not tax reform, it’s more of a tax cut masquerading as a reform. I would say the best part about it is the elimination of the estate tax.  That, in and of itself is a very substantial improvement. That tax should not be there;  it raises very little revenue but does tremendous damage to businesses.  It impedes the ability of a family business to be passed down from generation. It leads to the destruction and dismantling of businesses, the loss of know-how, ingenuity and jobs.

Fewer Tax Brackets

As far as the rest of the plan, I like lower taxes, I like fewer brackets (I’d like to have just one bracket – I’d like to flatten it all the way down to zero). Under the President’s plan, the brackets are 12, 25 and 35%.  I’d just as soon it would be one bracket of 25%.  If we are going to have an income tax let’s let everybody pay the same rate. The new plan is an improvement over the number of brackets we have now. But again, remember, some future President can just expand on these brackets. In fact they’re already talking about a fourth bracket because the highest bracket, 35% represents a reduction of the current top rate of 39.6%.  Of course you have to add the 39% Obamacare tax and, of course a lot of people have to add the state income taxes.

State and Local Taxes No Longer Deductible

By the way, if this version of the bill passes, state taxes will no longer be deductible. That was the one deduction that they were willing to give up, state and local taxes, but they preserved the home mortgage deduction. Personally, I’d rather see it the other way around: get rid of the home mortgage deduction and allow people to deduct their state and local income taxes.  I have a problem on taxing people on money they never got.  If the state taxes you, you never get that money.  Why should the Federal government tax you on the money the state took from you before you had a chance to get it?  I did a podcast on that idea. I think you can’t take income that was taken from the citizens by the state.  In fact it may even be unconstitutional.

Home Mortgage Deduction is All Politics

Why keep the home mortgage deduction? It’s all politics.  That deduction is bad economics. If we’re going to have an income tax, you don’t have a choice about whether or not to pay state and local taxes, but you have a choice about whether or not to buy a house. You shouldn’t get a deduction on your income tax based on the way you choose to spend your money. That’s the government trying to micro-manage buying decisions, trying to distort and influence the economy. But the housing industry is a strong lobby and they influence the tax code. It’s because of the swamp creatures that the mortgage deduction is there.

Standard Deduction is Doubled

Now the standard deduction is doubled. What this means is more people utilize this standard deduction, fewer people will itemize.  Itemizing is less advantageous because you can’t include your state and local taxes. Now if you own real estate, right now you deduct not only your mortgage but your property taxes. If you can no longer deduct your property taxes, obviously that will reduce the value of real estate because it increases the after tax cost of owning it.