As a small-business owner, and as a citizen and taxpayer, there is nothing I have wanted more from our federal government over the past 35 years than tax reform. Lately I have been reminded of the old admonition to be careful what you wish for.
Few people enjoy paying taxes, but my objection to the tax code was never about how much I pay. There are three basic problems I have with the system, starting with its overwhelming complexity.
The code itself consists of around 2,600 pages, but to understand those rules the way an accountant or tax attorney does, you would need to be generally familiar with another 70,000 pages of related regulations and case law. Because I am unwilling to spend all my free time reading IRS publications, I’m obliged to pay $600 a year to someone who reads them for a living.
I heard a number of prominent politicians claim that we would soon be able to do our own tax return on one side of a postcard. That would be quite a departure from the thing I file now, which was looking like a phonebook until it became an electronic document a couple of years ago.
Other than owning a business there is nothing that complicated about my finances, but I have a hard time even reading all the various “schedules” in my return, let alone explaining them. In most other industrialized nations, the process is much simpler, and many of them actually do use a postcard. Some of them, including Great Britain and Japan, have eliminated tax returns altogether.
My second problem goes back more than a century, to the moment when someone in government first got the idea of using the tax code to engineer the behavior of businesses and individuals. If the government wants to encourage people to buy homes, or companies to buy equipment, or somebody to drill for oil, or whatever, it simply tacks on a credit or deduction accordingly.
As much as I don’t like being manipulated, when money talks it’s hard not to listen. I once bought a car that came with a $4,500 tax credit, even though it made me feel as if I were robbing the Treasury. Somehow I doubt that the government is really improving the human condition by helping us make purchasing decisions for ourselves and our businesses.
Third is the problem that probably bothers most people the most, and that is corruption. I’m not talking about the illegal variety, like giving a congressman unreported cash or gifts in exchange for political favors. I’m talking about perfectly legal contributions to campaigns and political action committees from corporations and other large organizations.
No one doubts that these groups expect something for their money. In fact, it would be irresponsible of them to give away their shareholders’ profits or their members’ dues without getting anything in return. There are various services that a member of congress can provide to a donor, but probably the most coveted reward is an alteration to the tax code.
Companies are not mentioned by name in the legislation, of course. I heard on the radio recently that there was once a provision in the law for businesses that were incorporated on September 16, 1908. “They” would be General Motors.
Obviously, the three issues I’ve raised are related. If the income tax code were truly simplified, it would also reduce the unfairness caused by picking and choosing which expenses are deductible and which are not. If it were truly simplified, it would be much harder to insert amendments for the benefit of special interests.
It is not going to be simplified. I will give the current administration this, they made it clear up front that what they were after was a tax cut, not tax reform, although the president continued to promise that our returns in the future would be short and sweet. I have not yet read the final legislation, but it appears that there will be just as many brackets, deductions and other complications as there were in 2017, perhaps more.
For some of us, it won’t even be a tax cut. I live in New York State, which means that I pay very high state income taxes, very high property taxes, and very high sales taxes. About the only upside of that situation was that most of those taxes were deductible from my income before figuring federal income taxes.
The most contentious issue among the drafters of the new legislation was the deductibility of state and local taxes (SALT). The eventual compromise was to allow a maximum deduction of $10,000, which amounts to a small fraction of my actual SALT. Even with the new lower rates, my own taxes will almost certainly go up.
I know, it’s not about me, but I suspect that many of you may be in the same boat, especially if you live in the Northeast, the upper Midwest or the West Coast. We’ll see.
There was also a provision in the new law that will benefit me, as well as the majority of other business owners in the specialty toy industry. Most of the companies in this business, both retailers and manufacturers, are organized as “pass through” entities. My own company, for example, is a subchapter “S” corporation.
The final version of the new legislation includes a 20-percent exclusion on pass-through income up to $315,000 a year (for married couples, $157,500 for singles). In other words, the taxes on your pass-through income will be 20 percent less than they would be if it were simply added to your other income, as it has been in the past.
Essentially, that will make most of our companies a little more profitable, and that’s a good thing. If retailers were to use that money to develop a more comprehensive advertising and social media program, it might even move the needle.
Will it touch off a renaissance in the specialty toy business? I doubt it, but the larger question is whether the new tax law as a whole will be good for us or not.
That tax cuts stimulate the economy is not in doubt. They do it by borrowing more money from the future and spending it now, but whether they create enough stimulus to pay for themselves or not seems to depend upon whom you ask.
Some economists argue that the economy was doing well enough already, and that additional stimulus may trigger inflation, higher interest rates and even a recession. They say that we should be paying down debt right now so that we can increase borrowing when we really need to.
Perhaps someday we will have quantum computers that can settle these arguments, but until then we will have to do what we’ve always done; try something and see what happens.
Let’s keep our fingers crossed.