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The Economic Impact of Tax Reform

In a tax accounting class, many years ago, in the beginning of the textbook, it stated when Congress wants to make an economic change, they change tax law. In an economics class, it was taught that economics is the reallocation of resources (taking money from one area and spending it in another). The current tax reform and all the news reporting on bond activity are an indication of the changes occurring in the near future and will definitely have an economic impact for quite some time to come. 

When the 2007-2008 financial crises happened, I was neurotic. I read five newspapers a day and read the same article in each one looking for any detail that might differentiate from the others. Any information, as in terminology or any entity I was unfamiliar with, I researched. I could not begin to estimate how many hours I did this and the amount of knowledge I received was overwhelming. I did this because I care about my clientele and their financial well-being. It seems as if everyone is always uninformed on these matters. Economic changes are cyclical and each time, we have been unaware to avoid detrimental effect to ourselves, for example, the housing bust in the beginning of the 1990’s, the bust in the year 2001, and the financial crises in 2007-2008. From this I was curious and researched the cyclical occurrence of the recessions dating back as far as the Stock Market Crash of 1929. I found that a recession occurs approximately every ten years with the exception of one period of time lasting almost 20 years. It was my goal to be proactive in following financial news ever since. It is my hope to share my findings so that anyone can make changes to prevent further financial difficulty on their part.   

My interest was further peaked after attending a Public Forum with the IRS Tax Advocate in Harrisburg, PA. I posted about this meeting on my business Facebook page. Numerous times the Tax Advocate used the term, Future State of IRS. She further mentioned that she met with the Australian tax office to see the new changes they had implemented. This sparked my interest in wondering why our government agency would need to understand the changes of another government’s agency. I googled several large nations and used the term, Future State of Taxation, and found that we are headed in a global direction. All of the nations have a plan for a future state of taxation. This information has me constantly reading world news as well. I find that what is happening in other countries is either happening here or indications show that we are headed in the same direction. Just to name examples, numerous countries are having pension issues and many other countries are enduring debt issues. If you are like me, you have heard about these issues in the news, but did not fully understand the impact. I will give it my best effort to explain simply a very detailed topic and I request anyone with any information to add, “Please do!”

This post has been in the making for quite some time. I have closely followed the news on the tax reform; however, I have not posted, as sometimes the news reporting seems like a soap opera and the drama can change daily. I think it was a good choice, as promises from the beginning are not applicable to the final draft of the new law. There is not an “I WIN” postcard type of tax return. Taxes have not been simplified for the majority of the people. I will discuss some of the tax reform changes, but not in great detail, as I am sure all of you have learned as much through news reporting. I will, though, keep you posted throughout the upcoming year, as I have this year, with any seminar information. 

The areas of concern in the changes for tax reform is the reduction of corporate rate from 35% to 20%, slight reductions in individual tax rates, limitation on state and local income tax deduction, and elimination of personal exemption despite the doubling of standard deduction. These issues are further complicated by the lack of adjustments for inflation in deductions. 

·        While in theory reducing the corporate rate sounds as if it will be beneficial, if expenses are not fully deductible to a company, the bottom line profit is falsely stated resulting in higher taxes paid. This will require businesses to increase their prices to pay these fees having an inflationary impact on customers. Minimizing taxation at the corporate level allows for many small businesses to grow while providing jobs and benefits to employees. 

·        With the limitation on deducting the state and local deduction affecting state services such as schools, police, and drug treatment, state taxes would have to be increased or other fees, such as licensing of services, will have to be assessed to compensate for lost federal funding.

·        Removal of the personal exemption allowed, doubling the standard deduction and disallowing or minimizing deductions does not allow for as much of a reduction to income prior to taxation which will cause more people to pay taxes. One article stated that billions in additional revenue for the federal government over the next decade would be recognized by eliminating the inflation adjustments to deductions. Have you ever noticed that a personal exemption will be $4,100.00 one year and $4,150.00 the following year? These are the types of hidden costs that will affect personal taxes paid. I realize that example seems like a minor change, but all changes have an accumulative impact on the amount of money people have to spend. 

·        Furthermore, the requirement that the US change the representation of a company’s financial statements from Generally Accepted Accounting Principles (GAAP) to International Standards (used by all other countries) will accelerate the recognition of revenue incurring more taxation with more future changes to assimilate.

Additional tax reform is coming that would eliminate even more tax benefits to all of us in the pursuit of becoming global. Because I am fascinated with tax law, I have learned a great deal about other countries’ taxes as well. Many countries do not file corporate or individual taxes, but the residents of these countries are impoverished. They have non-existent retirement benefits, health insurances, free public education and owning homes. Sometimes it feels as if it is a no-win situation as writing Congress has no effect; however, how we react to the changes they are attempting to implement is fully in our power to avoid living in similar circumstances. When money is easy and refinancing of homes is being encouraged, don’t. Eliminate using credit cards. Save money. Live within a budget. This is how we can manipulate the economy to our benefit, but it will take all of us doing so for the effect to be felt. 

The Wall Street Journal reported that while the tax bill is being presented under the guise of tax simplification, Congress is only making minor tax cuts on the individual level. However, a tax break is being included for Star-Kist tuna, a South Korean-owned business, located in American Samoa that would inject an estimated $10 million a year to keeping the company in the territory. This is just one example of "claiming overhaul and streamlining the tax code to make our economy more competitive while in practice, giving Congress leverage to win support for legislation by favoring those that can afford to lobby." Newman’s Own Foundation, a $27 million dollar charity has spent $2 million to lobby for an extension to a law due to expire in November of 2018 to prevent a tax payment due for Unrelated Business Tax (due to not being charity income). 

To further complicate matters, we need to discuss the changes to municipal bonds and the effect they will have on the economy. Local governments use bonds to raise money for the purpose of financing projects such as infrastructure. The money is borrowed at low interest rates. The federal government is considering phasing out allowing the municipal governments to refinance old bond debt early to improve interest rates and postponing debt payments.  It is reported that this will result in an estimated $17.3 billion in revenue to the federal government over the next decade. Why would there be any need for cuts to Social Security or other “entitlements” with all of these types of increases in revenue? From an accounting standpoint, many other more sensible budgetary cuts would correct the current deficit.

Other facts about bonds are that investors do not include the interest they receive in their taxable income and the higher the rate of inflation, the higher the rate of interest the investor wants to earn as inflation erodes the purchasing power of a bond’s future cash flow.  How many people have noticed that bond interest rates are increasing which would indicate anticipated future inflation? We have gone from 7 years to 20 years to 100 years maturity on bonds during approximately the last ten years. This indicates a long-term economic impact. The last time we had a 100 year bond was during the Depression. The Reagan administration extended the length of time to bond maturity before allowing old bond refinancing as well. 

There are many similarities between the Reagan era and the current economic forecast. Reagan’s policy was to reduce government spending, reduce the federal income tax and capital gains tax, reduce government regulation (think of how Frank Dodd Act regulating financial institutes is being retracted) and tightening money supply to reduce inflation (currently this is being done through the Federal Reserve increases to interest rates). Unfortunately, the national debt tripled during his eight years as President. The US went from being the world’s largest creditor nation to the world’s largest debtor nation. We cannot continue on this path. I repeat: Eliminate using credit cards. Save money. Live within a budget. This is how we can manipulate the economy to our benefit, but it will take all of us doing so for the effect to be felt. 

I am not anti-tax and not just because I have made my living this way, but because it pays for roadways, first responders, military, education, and other such needs that can only be paid through the accumulation of funds from all. I am opposed to the misspending of the tax dollars by Congress that has a detrimental effect on the rest of us for the benefit of the few. People should not worry that Social Security supplemental income will not be available to them when they have paid into it (Please read book written by Bob Jennings, a respected national tax speaker, on how social security will not go broke). People should not feel frustrated over monetary issues, because outside factors are tightening their budgets.

I hope this information has been helpful in understanding the urgency of making changes to your finances to protect yourselves from any future detrimental outcome! Seek out the advice of your financial advisers, accountant or you can always call me.







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