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What Missing From Tax Reform: Smart-Rich Americans

by John on 10/23/2017

Tax ReformThe latest tax reform proposal is not entirely crazy.

But it fails in one big way.

It fails to encourage or incentive smart people.

Remember, we once had smart tax reform in 1986 under Reagan.  Congress wiped out numerous deductions and re-started the economy, laying the foundation for the 1990s boom.  The work of the GOP Congress back then led to the entrepreneurial boom that brought us Steve Jobs, Bill Gates, and others from the garages and basements of American homes.

For me, that vote in Congress confirmed what my Dad, a lifelong Republican, always told me when I was a kid in the 60s and 70s.  He said smart people will always thrive no matter what the economy or what Congress does.

My Dad is gone now, but I think he would think smart people are missing today.

As years went by after the 1986 tax reform, lawmakers – from both parties — slowly began piling on the tax givebacks to political donors, strangling the economy for the middle class.

It seems today the “older wealthy” are trying to protect themselves rather than create more wealth.

And it makes sense.  Here’s why:

  • We are an aging society. That means the wealthy who are in their 60s and older are – logically — trying to conserve their money and not risk it.
  • We live in a technology age that reduces or eliminates jobs; not creating more jobs or employee income.

Too many Americans either don’t see these new trends or they want to live in the 1990s again – which are not coming back.

Since most of us don’t see this new economy sitting in front of us, we get ridiculous trickle down theories with the false refrain that big tax breaks for the wealthy “trickle down” as jobs to the middle class and poor.  Maybe in the 1950s and 1960s; but not today.

So how do we create tax reform so the wealthy-smart among us put their money where their mouths are again?

First, set these goals:

  • Spur economic growth and jobs
  • Encourage retirement investment
  • Create more income equality so even a low-paying job brings a roof over your head
  • Reduce healthcare costs which are going to spiral out of control with taxpayers footing the bill for baby boomers’ Medicare costs
  • Reduce government deficits and the national debt so the long-term economy is not in danger.
  • Spread the pain of cuts to all income levels

To me, the Administration’s tax reform outline seems like a cushion for wealthy baby boomers – and not an economy booster.

Next, consider these proposals:

  • Drop corporate tax rate to 25% as the Administration proposes that should be in line with other nations.
  • However, eliminate most corporate deductions that create a phony, invisible, effective lower tax rate.
  • Especially remove the corporate deduction for employee healthcare. This keeps healthcare costs high for everyone – especially the working middle class — while deterring job creation.  At the same time, this deduction encourages corporations to embrace higher healthcare costs which bring bigger deductions and tax savings.  Removing this deduction will also give Libertarians a true free market in healthcare which most of them want — but fail to prescribe.
  • Keep the corporate deduction for employee re-training.
  • Increase tax rates for investment income from 15% to 25%. Investors will be taxed similar to employee’s income.  My friends in financial industry won’t be happy.
  • Reduce middle class tax rates especially for families.
  • Keep the IRA and 401K deductions and allow unlimited amounts — no caps — at least for the next 5 years then review.
  • Allow the deduction for Health Savings Accounts for any healthcare costs while allowing unlimited deductions treating it like an IRA after age of 65.
  • Eliminate nearly all other deductions for individual filers — with the exception of the charitable deduction. Yes, I would eliminate the mortgage interest deduction. Sure it will cause problems at first in the real estate industry, but eventually we will get a true market with fewer booms and busts.
  • Why reduce nearly all deductions? Because we all need to sacrifice – not just the financial and real estate industries — for the greater good.  Plus, do you really think this divided and paid-off Congress can come together and choose winners and losers?    So let’s cut across the board and start all over.
  • Increase or keep the estate tax. Again, the smart rich will find ways to shelter their incomes – like life insurance.
  • Increase tax rates for high income earners – over $250,000 – to a minimum of 45%. This will also force the wealthy smart to invest and create new companies to spur the economy.  The wealthy can reduce their tax bill by investing in new companies. Those new companies will, under my plan, see lower taxes.

This is based on a lot of the research done by the Simpson-Bowles Commission that was never enacted, as I write about here.

Your turn.  Have at it.

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