Opinion: We're long overdue for tax reform
October 12, 2017
The last time the U.S had any major tax reform was in 1986. That was 31 years ago – in the midst of birthing our millennial generation!
Throughout Donald Trump’s presidential campaign, tax reform was one of his biggest promises of change. And, truthfully, there has never been a better time for the GOP to create these changes with control of the White House and both houses of Congress.
A blast from the past
Let’s go back to the last time there was a major change to the tax code. (Some of us weren’t even born, yet, while others may have just started kindergarten.) At that time, Ronald Reagan was president, and the world looked like a much different place than it does today. The goal back then? To simplify the tax code and more fairly redistribute the tax burden. Sounds familiar, doesn’t it?
Some of the changes successfully made with the 1986 Tax Reform Act were similar to what’s being proposed in today’s reform package, such as consolidating and reducing the number of income tax levels. Another similar focus for both reform packages is on the loopholes that allow certain people to avoid paying taxes.
Three decades later
Since 1986, a number of loopholes, credits and deductions have been added to the tax code, accounting for a 44 percent growth in such additions and resulting in a tax code that went from 30,000 to 70,000 pages. (Are you shaking your head and wondering how that’s possible?)
Throughout our lifetime, lawmakers have added modifications intended to encourage certain behaviors — everything from buying hybrid vehicles to replacing your home’s windows; from adopting children to putting them in daycare. And, now we have a tax code that’s once again quite complicated and confusing — and in need of another major overhaul.
With that understanding in place, let me point out the framework of the changes proposed in the current tax reform package.
Changes for families and individuals
- The number of individual tax rates would shrink from seven to three. Those rates would be 12, 25 and 35 percent. However, the income ranges have not yet been determined for those brackets.
- The standard deduction increases to $12,000 for single filers and $24,000 for married ones.
- The child credit would increase to $1,000 per child under the age of 17.
- Most of the itemized deductions will be eliminated, which includes personal exemptions of $4,050.
- There are still incentives for homeownership, retirement savings, charitable giving and higher education. Those deductions are staying around.
- The alternative minimum tax (AMT) will be eliminated. This tax was designed to keep wealthy taxpayers from using loopholes to avoid paying taxes. It normally becomes effective for filers making between $200,000 and $1 million.
- The estate tax would also be eliminated. This tax applied to the transfer of any estate valued over $5.49 million upon the death of the owner. Currently, an estate of this size is taxed at 40%; anything under $5.49 million is not taxed.
Changes for businesses
- The corporate tax rate would be reduced from the current rate of 25 percent to 20 percent.
- The reform also proposes changes to how multinational companies are taxed on profits made outside of the U.S. Currently, companies with overseas profits are only taxed when they bring those funds back into the U.S. The new tax reform states that those companies would be subject to the tax of the government where the money is made instead of just what’s brought into the U.S.
These changes are pretty drastic. The end goal is to put more money into the taxpayer’s hands and, in turn, into the economy, ultimately increasing GDP and boosting a healthier overall economy. Whether this proposed reform will pass still stands to be seen, but it is certainly time for a simplified tax code.
Jennifer Pagliara is a financial adviser with CapWealth Advisors.
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