Immigrant Businessman Talks America’s Need for Tax Reform

SPRINGFIELD, Missouri—David Bakare immigrated from Nigeria to attend college in the United States. Wanting to run his own business, Bakare borrowed funds from his dad to purchase Executive Coach Builders, a luxury limousine manufacturer in the United States that now has more than 100 employees. In an interview with The Daily Signal, Bakare shares his thoughts on the IRS, and the need for real tax reform in the United States.

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After Conference Agreement, Trump Pledges ‘Giant’ Tax Cut for Middle Class

Bryant Glick was among five speakers grateful to President Donald Trump Wednesday as sweeping tax reform moves closer to passage.

“Well done. Many of your predecessors promised this reform was coming. But you did it,” said Glick, of New Holland, Pa., attending a White House ceremony with his wife Ashley Glick.

The Glick family, who have two children and a third on the way, will go from a 15 percent tax bracket to 12 percent. With tax reform, their tax bill will go from $2,600 to $600, as Trump noted when he introduced the couple. Bryant is a manager at a farm equipment store, while Ashley works in health care.

“We are greatly excited about this,” Bryant Glick said. “With the tax savings we are going to see, we are going to put that money into home renovations. I’m excited that you are the one that got it over the finish line.”

Trump said that Congress has reached a deal on an overhaul of the tax code to lower rates for individuals and businesses and eliminate loopholes.

While conference committee negotiators have hammered out differences between the House and Senate reform plans, the compromise must still be passed by both chambers—and could reportedly get a vote as early as next week.

“We are reclaiming our destiny as Americans, as a nation that thinks big, dreams bigger, and always reaches for the stars,” the president said. “We didn’t become great through massive taxation and Washington regulation.”

Trump didn’t talk about details yet, but said if Congress sends him a tax bill by Christmas, Americans will see fewer taxes taken out of their paychecks by February 2018.

“As a candidate, I promised we would pass a massive tax cut for the everyday, working Americans who are the backbone and heartbeat of our country,” Trump said. “Now we are just days away from keeping that promise and delivering a truly amazing victory for American families. We want to give you the American people a giant tax cut for Christmas.”

Trump was surrounded by middle class families from Iowa, Ohio, Pennsylvania, Virginia, and Washington state.

“Our current tax code is burdensome, complex and profoundly unfair – it has exported our jobs, closed our factories, and left millions of parents worried that their children might be the first generation to have less opportunity than the last,” Trump said. “I am here today to tell you that we will never let that happen.”

Both the House and Senate passed plans that would reduce the corporate tax rate from the highest in the industrialized world of 35 percent to 20 percent, the Associated Press reported. However, to make up for revenue, House and Senate negotiators decided on 21 percent.

The change will have some impact on growth, said Adam Michel, policy analyst for economic studies at The Heritage Foundation. Estimates showed the difference between a 20 percent rate and a 22 percent rate would mean a reduction in economic growth of 10 percent, Michel said.

“This could cut into the growth that Americans were promised, but it is still a big improvement,” Michel told The Daily Signal.

Michel was encouraged by initial reports that the top individual rates will go down from 39.6 percent to 37 percent. Under the House plan, the top rate stayed the same and the Senate plan only lowered it to 38.5 percent.

Critics of tax reform raised concerns about the debt and deficits.

“That concern is overblown,” Michel said. “It is a pro-growth plan and will recoup most, if not all, of that revenue.”

The House and Senate bills rolled back the deduction for state and local taxes, also called SALT, but allowed for a $10,000 property tax deduction. This deduction faced criticism for essentially subsidizing high-tax, high-spending states to the detriment of fiscally responsible states.

Negotiators also agreed to eliminate the Alternative Minimum Tax, long criticized for hitting middle class families even though it was designed to ensure wealthy earners don’t escape taxes.

The House and Senate negotiators also are lowing the mortgage interest deduction from $1 million to $750,000. The House bill proposed to cap the mortgage on $500,000 homes, and the Senate bill kept the entire deduction in place.

During a meeting, while making public comments, with some of the conferees at the White House earlier, Senate Finance Committee Chairman Orrin Hatch, R-Utah, said, “We’ll get it done.”

During the meeting, Trump thanked Hatch and House Ways and Means Committee Chairman Kevin Brady, R-Texas. But, in a vague reference to the failed effort earlier this year to repeal and replace Obamacare, Trump sounded a note of caution.

“You guys have been just really, really amazing,” Trump said. “Although I shouldn’t say that until we sign. We’ve been there too many times. Let’s count the vote first. Right?”

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Killing the Obamacare Tax Penalty Would Not Amount to a Tax Increase

Only in Washington can removing a tax penalty be considered a tax increase.

The proposed tax overhaul that is quickly making its way through Congress would eliminate Obamacare’s individual mandate. That mandate—ruled a “tax” by the Supreme Court—charges taxpayers anywhere from $695 to upward of $10,000 (based on their income) if they do not purchase the type of health insurance that the federal government requires them to.

According to the most recent IRS report, for the 2015 tax year, 6.2 million taxpayers paid the penalty and 82 percent of those taxpayers made less than $50,000 per year. Another 12.7 million taxpayers qualified for an exemption, and 4.3 million more failed to report their health insurance status on their tax forms.

Without eliminating the individual mandate penalty, any of those 4.3 million taxpayers that didn’t report their health insurance coverage status and are not enrolled in an approved health plan will also have to pay the penalty next year when greater enforcement measures are scheduled to kick in.

So how does removing hundreds or thousands of dollars in “tax” penalties result in a tax increase, as some claim?

Well, if an individual or family decides that it is not in their best interest to purchase highly regulated, expensive, and often excessive health insurance, they will forego any Obamacare tax subsidy that they would qualify for if they did purchase the coverage.

Depending on each taxpayer’s income and available health insurance options, the Obamacare subsidies can range from no more than a few dollars to over $12,000 a year per individual and upward of $20,000 per year for families.

It is because the Congressional Budget Office counts those lost credits as tax revenue increases that the bill has been said by some to increase taxes on individuals and families making less than about $40,000 per year.

However, when the Congressional Budget Office looked at the impact of the proposed tax reform excluding the effects of eliminating the Obamacare penalty, it determined that all income groups would receive significant tax cuts through 2025.

The Congressional Budget Office’s conventional methodology, which says eliminating the Obamacare penalty would produce an increase in tax revenue, is misleading. What they are really saying is that the government would lose less revenue because some people would voluntarily forego a tax credit that they would otherwise claim if they bought the coverage.

The argument that this is somehow a tax increase also misses two other important points:

  • Declining the tax credit is optional.

The alleged tax increases—as a result of not receiving an Obamacare subsidy—are entirely optional. Individuals and families who currently receive tax credits for their health insurance can continue to receive the exact same credit under the proposed bill.

The only change is that they have the option—without penalty—to not purchase the government’s proscribed health insurance and, as a consequence, to not receive a tax credit.

Under the proposed bill, any time they change their mind, they will still qualify for the exact same premium tax credit that they would currently get for buying the coverage.

  • Taxpayers can’t spend the credits on what they want.

Unlike other tax credits that individuals receive back as cash, which they can spend on anything, Obamacare tax credits aren’t like cash. They’re more like gift cards that can only be used to purchase certain types of qualified health insurance from insurance companies.

Obamacare credits do not boost individuals’ or families’ disposable incomes. Instead, they boost insurance companies’ revenues. Eliminating the individual mandate penalty, on the other hand, could increase taxpayers’ disposable incomes by hundreds or thousands of dollars.

To count the decisions of some people to not buy health insurance—and thus forego Obamacare tax credits that were never actually delivered to them—as tax increases, is misleading to say the least.

Eliminating the Obamacare individual mandate will not reduce any taxpayer’s incomes by a single cent. It will, however, reduce the tax bills of many individuals’ and families—based on their own choices—by hundreds, if not thousands, of dollars.

And most importantly, it will leave taxpayers freer to make personal decisions absent the heavy hand of Uncle Sam.

The post Killing the Obamacare Tax Penalty Would Not Amount to a Tax Increase appeared first on The Daily Signal.

Tax Legislation Must Repeal the Death Tax

Lawmakers are currently working out the differences between the House and Senate tax bills. On the estate tax—also known as the “death” tax—they should follow the House’s lead and fully repeal it.

As reflected in the text of both the House and Senate bills, there’s no disagreement between the House and Senate that the estate tax is bad policy.

Under current law, estates have to pay a 40 percent tax on any assets over $5.49 million per person (this amount is referred to as the “basic exclusion”). Both bills would double the amount of this basic exclusion.

The House bill though, unlike the Senate bill, would fully repeal the estate tax, albeit not until after 2024. The Senate bill wouldn’t repeal the federal estate tax at all. Maintaining this tax, as the Senate would do, would squander a rare opportunity to put an end to this unjust and damaging tax.

Using the force of government to tax the hard-earned assets of people who have died is also immoral. Even worse, the federal government is taxing the same income twice, once when the income-earners were alive and again after they have died. Some defend the status quo by claiming that few estates have to actually pay the estate tax. That may be true, but it isn’t a policy argument against the merits of the tax.

If there’s a bad policy, the solution is to get rid of the policy, not to impose a widely recognized bad policy on fewer Americans. Moreover, it ignores all of the individuals that incur costs trying to avoid the estate tax.

Those who point to the small number of estates paying the estate tax are inadvertently helping to support another criticism of the estate tax: This tax exists despite the fact that it generates little revenue for the federal government, about half of one percent of total federal revenue.

Then, of course, is the class warfare argument that repealing the estate tax would just help the rich. Even if true, how does that justify this specific tax? Should individuals who have built small businesses and family farms be punished for their hard work and success?

There needs to be some context as to who really does pay the estate taxes. For example, in the agricultural context, according to the U.S. Department of Agriculture, 57 percent of the family farms that owed estates taxes were small family farms (gross cash farm income of less than $350,000).

Of course, these estates do have significant wealth. But this shouldn’t be confused with significant income.

Much of the wealth of these farms, and most family farms, is tied up in land. This means that when heirs do have to pay estate taxes, there is often a need to sell off land (or other assets) to pay off the death tax.

In trying to grow the economy and increase jobs, having a policy that compels businesses to contract is obviously counterproductive.

The full negative impact of the estate tax, though, isn’t captured by who is paying the estate tax. It is fully captured by understanding how the tax impacts those who don’t pay it.

Imagine owning a small business and recognizing that if your assets exceed a specific level, a major tax could be triggered after you die. Your hope of passing on the fruits of your labor to your family could be severely hampered if you are too successful.

Such a tax is literally a disincentive to success.

The logical response is to take actions to avoid such a consequence. This might mean consuming your assets now as opposed to saving. It might mean deciding against growing a business, such as by investing in equipment or for that matter, investing in more people by creating jobs.

The estate tax distorts decision-making in a way that is counter to promoting economic prosperity, not just for the business owner but for the workers they would otherwise employ. If policymakers are going to “make American great again,” then they need to get rid of those policies that are the very antithesis of American principles.

Someone would be hard-pressed to find anything more un-American than the federal estate tax—a tax that rejects the idea of people building their American dream for themselves and for their families.

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Why Setting the Corporate Tax Rate to Benefit Wealthy Taxpayers and High-Tax States Is a Terrible Trade-Off

Tax reform that broadens the tax base, reduces unfair and distorting loopholes and deductions, and cuts marginal tax rates promises to grow the economy. Yet Congress is considering undermining the full potential of tax reform because of pressure from special interests.

Eliminating a federal tax policy that provides an income tax break of nearly $200,000 to millionaires living in New York and California while requiring higher marginal rates for everyone else is a perfect example of achieving that pro-growth objective.

The proposed House and Senate tax reform bills did away with much of that economically destructive subsidy for state and local taxes by limiting it to a maximum property tax deduction of $10,000. But now, lawmakers are considering caving to the special-interest demands of a few of their colleagues from high-tax states such as California, New York, and New Jersey.

Those who are hijacking pro-growth tax reform want the federal government to subsidize the largesse of their own state governments. Making taxpayers in lower-tax states pay for the goods and services provided by high-tax states is neither fair nor good tax policy. And it just might encourage states to raise their taxes even higher.

Increasing state and local tax deductions reduces tax revenues, and therefore requires higher taxes elsewhere to bring in the same amount. Instead of reducing the corporate tax rate to 20 percent, lawmakers now are considering increasing that rate to 22 percent to pay for these special-interest tax provisions.

A higher business tax rate would negatively affect Americans across all states and all income levels. It would make U.S. businesses and the workers they employ less competitive with the rest of the world than they would be with a tax rate of 20 percent or lower.

That is the opposite of pro-growth tax reform. Trading a special-interest tax deduction that encourages bad economic policy (higher state and local taxes) for a higher rate on one of the most economically destructive taxes—the corporate tax—is a horrible idea.

Corporations don’t pay taxes, people pay taxes. The people who pay corporate taxes include workers, shareholders, and consumers. And those shareholders include not only wealthy investors but also retirees, nonprofits, and anyone with a pension or retirement account.

Recent studies provide growing evidence that in an open economy such as the U.S., workers bear a majority of the corporate tax in the form of lower wages—and this share is increasing.

Raising the corporate tax rate above the proposed 20 percent level that both the House and Senate previously stipulated would result in smaller paychecks and fewer jobs for workers who are employed by those corporations, higher prices for everyone who purchases goods and services from those corporations, and lower dividends and capital gains for shareholders of those corporations (many of whom are retirees).

That’s a big price to pay for providing a subsidy to a small fraction of wealthy taxpayers in high-tax states.

Very few low- and middle-income taxpayers would benefit from a higher state and local tax deduction, because not many of them currently itemize their deductions and even fewer would under the roughly doubled standard deductions of the reform proposals.

In fact, because of the higher standard deductions, The Heritage Foundation estimates that fewer than 6 percent of taxpayers who make less than $100,000 a year would benefit from keeping the state and local tax deductions.

Among those making between $50,000 and $75,000, only 4 percent would benefit. And among those in the $25,000 to $50,000 income range, fewer than 2 percent would benefit.

Lawmakers need to return to the principles of pro-growth tax reform and reject special-interest and economically destructive provisions that would benefit a small minority of wealthy taxpayers at the expense of lower wages, fewer jobs, smaller returns on investments, and higher prices for all Americans.

The post Why Setting the Corporate Tax Rate to Benefit Wealthy Taxpayers and High-Tax States Is a Terrible Trade-Off appeared first on The Daily Signal.

Conservatives Push for 20% Corporate Tax Rate

Following a report suggesting the corporate tax rate in Republicans’ final tax reform bill could be higher than 20 percent, some conservatives are making the case again for the 20 percent rate.

“If we want to see wage growth to help America’s families, a rate reduction on employers has to be part of the picture,” Pete Sepp, president of the National Taxpayers Union, said in a conference call Monday.

The Hill reported that as lawmakers in the House and Senate work in conference to resolve their differences, the 20 percent corporate tax rate could be in jeopardy.

The Senate tax reform bill, which passed 51-49 Dec. 2., cuts the corporate tax cut from the current 35 percent rate to 20 percent, but would not go into effect until 2019.

“If we want the small businesses who supply and subcontract with corporations to have greater opportunities … a rate reduction on corporations is necessary,” Sepp said.

Since President Donald Trump originally campaigned on cutting the corporate tax rate to 15 percent, Grover Norquist, president of Americans for Tax Reform, said lawmakers should not consider raising the rate.

Andy Roth, a vice president of the Club for Growth, said, “The average American family out there that is looking for tax relief, they’ve got to be bewildered by what is going on right now, that we’re even having this conversation about why the corporate tax rate shouldn’t go up past 20 percent.”

“The best way to restore confidence with the American taxpayer is to forget all of this horse trading and all of this fighting about keeping various loopholes and deductions and go with the most pro-growth tax cuts that both chambers and the White House has agreed to,” he added.

Nathan Nascimento, executive vice president of Freedom Partners, said a 20 percent corporate tax rate would foster economic growth.

“Today’s 35 percent corporate tax rate is not competitive, and today’s tax code is not fair,” Nascimento said. “While neither bill is perfect, reducing the corporate tax rate from 35 to 20 [percent] would send a message to the rest of the world that America is going to compete, and importantly it would begin to level the playing field for all businesses, especially those who don’t get the special carve-outs in today’s tax code.”

A report released Monday by the Treasury Department said the Senate tax plan would do more than pay for itself, “boosting revenue by $300 billion over 10 years,” according to The Washington Times.

“Treasury expects approximately half of this 0.7 percent increase in growth to come from changes to corporate taxation,” the report reads. “We expect the other half to come from changes to pass-through taxation and individual tax reform, as well as from a combination of regulatory reform, infrastructure development, and welfare reform as proposed in the administration’s fiscal year 2018 budget.”

Trump, who has said he wants to sign a bill by Christmas, says he is confident the tax reform legislation will pass soon.

Adam Michel, a tax policy analyst at The Heritage Foundation, told The Daily Signal in an email that raising the corporate tax rate beyond 20 percent is “unacceptable.”

“The 20 percent corporate tax rate is the main item driving the tax reform coalition,” Michel said, adding:

The most important reason for tax reform is to fix our uncompetitive business tax system, which has held back American wage growth and job creation. Raising the corporate tax rate to 22 percent means the combined U.S. tax rate will remain above both the [Organization for Economic Co-operation and Development] and worldwide averages. It also reduces the long-run economic growth by more than 10 percent.

A vote on the final bill is expected “as soon as December 18,” according to CNN.

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Senate Should Follow House’s Lead in Nixing Special-Interest Loopholes

President Donald Trump is right. Washington is a swamp, infested with special-interest groups feverishly working to keep their place in the capital bog.

Our current tax code is the leading example of institutionalized privilege—bought and paid for by lobbyists.

The tax code is riddled with privileges—special deductions for manufacturing, credits for everything from research to energy production to child care, and exemptions for medical costs, commuter expenses, and commercial development.

Tax reform should eliminate all these tax subsidies, which would allow for lower tax rates for everyone and full expensing. The result would be a fairer and more pro-growth tax code.

The House version of the Tax Cuts and Jobs Act would do a tremendous job of eliminating a large number of privileges in the tax code. The Senate proposal would also remove or limit several large subsidies, but would leave many existing loopholes targeted by the House intact.

As the conference committee works to reconcile the differences between the two versions of the bill, lawmakers should follow the House’s approach when considering which tax preferences to eliminate.

In the 10-year budget window, the House-proposed reforms include the repeal of almost $750 billion worth of tax carve-outs for both businesses and individuals. None of these were included in the Senate bill.

In the table below, each tax preference is listed with its estimated fiscal impact (where available) and whether or not each subsidy would be removed in the House and Senate tax plans.

Tax reform should eliminate as many subsidies as possible, and certainly not include any new or expanded special-interest handouts.

In addition to the reductions in subsidies included in the table, the House bill would expand three different energy credits: the energy investment credit, the residential energy efficient property credit, and the nuclear power credit. These three credits combined are valued at $36 billion over 10 years.

With a fiscal impact of $9 billion, the Senate bill would add a new credit to the tax code for employers who provide family and medical leave, and would expand the medical expense deduction—a health cost subsidy that the House tax plan would eliminate.

In addition to the tax preferences explicitly mentioned in the two tax reform bills, several other large preferences are left untouched.

The research and development tax credit and the low-income housing tax credit for corporations are valued at a combined $242 billion. The remaining deduction for up to $10,000 of individual property taxes is valued at $148 billion, the corporate deduction for state and local taxes is about $140 billion, and the exclusion for interest from municipal bonds clocks in at about $300 billion.

Many of these items are politically sensitive and are not included for elimination for political reasons. However, combined, the total value of the tax subsidies retained in the Senate version of the Tax Cuts and Jobs Act is more than $1.5 trillion.

For those counting, that could equate to just shy of a 10 percent further reduction in individual tax rates—basically doubling the current individual tax cut in the Senate bill. It could also more than double the currently proposed corporate tax cut.

The conference committee should begin its work with the Senate-passed proposal because it improves on many of the House reforms. The committee should, however, defer to the House-passed bill when it comes to repealing special tax privileges.

The appropriate combination of the two versions of the Tax Cuts and Jobs Act can begin to drain the swamp and strengthen the pro-growth aspects of the legislation.

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