A Guide to the Tax Changes

[VacationForever]

My only problem with it is that it was not made permanent for individuals. I don't know what the intermediate to long-term impact will be, but I am fairly certain interest rates are headed up-way up. And when that happens, we will be in a recessionary environment, and stocks will fall (usually prior to the start). And the budget deficit will grow. And taxes will probably go back up (or they will not be made permanent for individuals).

...and you really think it won't be extended? Everyone loves a tax cut. It will be extended and I expect even more reduction at that time because no party at that time will ever let it expire.

 

[ace2000]

...and you really think it won't be extended? Everyone loves a tax cut. It will be extended and I expect even more reduction at that time because no party at that time will ever let it expire.

I vote that we worry about that in 2025 when the tax cuts expire. Definitely nothing to worry about now.

 

[bluehende]

If rates are lowered 2% for each tax bracket, then the more money that someone makes, the higher the tax cut.

The cumulative effect of all those cuts will be a stimulative to the economy, more economic growth which will produce more revenue for the government.

I wish it were that simple. You also have to take into account the addition to the debt. CBO estimate of 1.5 trillion. This adds a lot of supply on the debt side. This will raise interest rates thus chilling the economy. Also the fed will step in if the economy gets too hot again putting upward pressure on interest rates.

Here is an article from Forbes (certainly not liberal bias) about this.

https://www.forbes.com/sites/anthon...e-promises-of-the-gops-tax-plan/#18ff549b338e

Here is the appropriate discussion.

This GOP's problem isn't in its claim that tax cuts lead to economic growth. The problem is the notion that tax cuts will fully pay for themselves with economic growth. It is a claim that flies in the face of common sense, battle-tested economic theory, and approximately 100 years of history.

But if it were true...if the GOP could point to a study and say, "See that! The $1.5 trillion in tax cuts ends up costing the IRS no revenue at all!" it would make its tax plan much more salable to a distrusting public, and more importantly, skittish Senators. A member of the Senate who ran on a platform of being deficit averse could justify a yes vote for the plan if he or she could point to anything that would indicate that after accounting for growth, the plan won't actually increase the deficit by a dime.

Yesterday, the Tax Policy Center released its dynamic analysis of the House version of H.R. 1, and the results were...not good.

The study concluded that the $1.5 trillion in tax cuts proposed in the plan would not fully pay for themselves; in fact, after accounting for economic growth, the plan would result in...$1.3 trillion in tax cuts.

That's right...the sweeping cuts offered under the GOP plan would create enough economic growth to bring in an extra $160 billion over the next decade.

Why is the boost so small? The Tax Policy Center cites a number of reasons:

• Limited boost in consumer demand. This is attributable to the fact that over the next ten years, it is the richest 5% of taxpayers who enjoy the biggest benefits under the House plan, and these taxpayers tend to spend a smaller portion of any increase in after-tax income when compared to lower income taxpayers.
• Because the plan would add significantly to budget deficits unless spending cuts are enacted, interest rates will rise, discouraging business owners to further invest in their business.
• The economy is already at near-full employment; as a result, any uptick in consumer demand resulting from an increase in after-tax income will result in only a small increase in output.

 

[CalGalTraveler]

I came across info yesterday that stated interest from a home equity line/loan will no longer be deductible unless the funds were used to acquire or improve your residence.

With mortgage rates still low, wonder if there will be a spike in refinancing to move home equity debt over to a mortgage.

I could see this happening if rates stay low. Does anyone know whether a second home mortgage is still deductible?

Update: the California legislature introduced a bill yesterday to work around the SALT deduction cap by creating a state foundation; New York (Cuomo) is not far behind to apply same to NY state. (IMHO...not taking action would have disastrous results for homeowners in these states. We would be forced to either sell our home (at a reduced value thus affecting our eventual retirement fund) and move out of state, or do a complicated sale and leaseback of our home as a pass-thru business to get around the SALT cap which would incur unnecessary transaction costs and line the pockets of tax avoidance opportunists.)

http://www.washingtonexaminer.com/c...round-for-tax-laws-salt-limit/article/2645026

The feds "poked the bear" (LoL the California Golden bear) by pouring SALT on the wound (ahem) - the poor ROI from federal program benefits vs. tax contributions paid, makes California less reliant on the Federal Government and enables the California state government to structure its own taxes, trade laws, climate change, sanctuary cities , marijuana etc.. With a GDP greater than France, Russia and Canada, California is negotiating with other countries on its own.

 

[isisdave]

Friends, both working one independently, said they were looking at something like a $5000 to $10,000 tax cut ( maybe more if he can declare himself a pass through entity.

Or he might be mistaken. I think a lot of people confuse "income" with "taxable income" on those "see how you're affected" websites, and there will be a lot of surprised people a year from now. To get a $10,000 tax cut, you'd have to lower your taxable income by almost $40,000 if you're in the 25% bracket. Maybe he applied the 20% pass-thru deduction to gross income rather than net.

 

[isisdave]

I am really impressed by the thoughtfulness, politeness, and consideration given by everyone in this thread. In most of my other "communities," you can't say "nice day!" without getting an argument or an insult. PLUS, I just got a deal on a last-minute rental in Las Vegas. TUG is just so great on so many levels!

It seems to me that the thing to worry about as the debt increases is that the interest we have to pay on that debt further squeezes the budget, making it harder to pay for (new) things we might need (like infrastructure, or moving the coastal cities 6 feet higher so they don't flood every year) harder without raising taxes or displacing other spending. Usually, this is like "boiling the frog" and we don't notice it much from year to year, but a sudden rise in interest rates would sure get peoples' attention. This probably won't be a problem in our lifetimes, but we can't keep borrowing forever.

 

[CalGalTraveler]

I do believe the reform has some positive, long overdue changes for business. I hope it reduces current tax incentives to locate overseas and incents businesses to repatriate funds. There are also benefits to small businesses via pass-thru and this may incent more entrepreneurship and investment into these businesses which could contribute to growth and taxes.

Will this completely offset the deficit created? Who knows? Time will tell.

 

[Elan]

Except that many upper income people are not going to spend the money. We will receive a substantial tax cut, but will not spend it; it will go in savings.

Exactly. There's a big difference between additional income, and additional disposable income.

 

[bobpark56]

If you do not like subsidizing, then each state should get back the same ratio of their taxes to use as they wish. So in order not to subsidize the taker states we need to reduce the federal tax bill for high tax states by up to 35% or send them 50% more money. That would eliminate the actual subsidizing going on here. That is why I use the unfair word. If a state is paying more than their fair share of taxes then adding to that tax bill is unfair. And those tax breaks are available to everyone, why should a high tax state not use a break because your state does not want to? Do you have any evidence that lower tax states manage their finances any better? It would be nice if NYC government offices could move to Alabama to save money on real estate and wages, but that is not very practical. The better correlation seems to be in vibrant economies. Look at the GDP per capita and you will find the high tax states at the top and the low tax states at the bottom. Have you considered that high tax states provide more services and some that low tax states use grants from the federal government to provide.

I could make your same argument on any tax break. Why should I subsidize families with kids. I will answer. Because it is the right thing to do.

I don't understand why you think it is the federal government being unfair rather than the high-tax states being unfair. After all, it is the states with high taxes that are causing the problem you are complaining about.

 

[Roger830]

I'm surprised that there is so much concern about the national debt. I don't recall such concern in the past.

The debt at more than $20 trillion will never be paid. Nobody knows how it will play out.
Usually large government debt is washed away via inflation. It's likely that will happen here.

Extremely low interest rates indicate financial markets don't care about the size of the debt.
When they do care, nothing else will matter and it won't be pleasant.

 

[bobpark56]

Yeah, I recall that era -- unfettered military spending ($650 toilet seats, anyone?) coupled with tax cuts. Pure genius.

<snip>

Sent from my Moto G (5S) Plus using Tapatalk

If I recall correctly, those $650 rates were for aircraft toilet seats from a production line that had been terminated years earlier. If a company has to restart a production line to produce a relatively small quantity of toilet seats, do you really think it will do so for, say, $25 a seat?

 

[bobpark56]

Except that many upper income people are not going to spend the money. We will receive a substantial tax cut, but will not spend it; it will go in savings.

Banks will reinvest/loan out those deposited saving, will they not?

 

[lizap]

I'm surprised that there is so much concern about the national debt. I don't recall such concern in the past.

The debt at more than $20 trillion will never be paid. Nobody knows how it will play out.
Usually large government debt is washed away via inflation. It's likely that will happen here.

Extremely low interest rates indicate financial markets don't care about the size of the debt.
When they do care, nothing else will matter and it won't be pleasant.

Eventually markets will care. As interest rates head up, debt will become a much bigger issue as the cost will become higher since it will be financed at higher rates. Interest rates will eventually head up, probably sooner than later. We are in one of the longest economic expansions of all time..

 

[lizap]

Banks will reinvest/loan out those deposited saving, will they not?

Who knows what the banks will do? I know there's a limit as to how much of their deposits they can lend out.

 

[Elan]

If I recall correctly, those $650 rates were for aircraft toilet seats from a production line that had been terminated years earlier. If a company has to restart a production line to produce a relatively small quantity of toilet seats, do you merely think it will do so for, say, $25 a seat?

That was one example. There's stuff all over the web (and I remember nightly reports back in the day when it was "real time") of $7000 coffee pots, and $200 hammers, etc. Google "excessive defense spending 1980's" or something like that to get a perspective on how out of control military spending was back then. As an added point, my brother graduated from AOCS and served during that time period. He told me first hand that if he wanted something, all he had to do was ask. Said it was sickening.

 

[isisdave]

Last fall we were in Catalonia, where about half the people want to separate from Spain. "No fair!" they say, "we send far more money to Madrid that we get back, because we are the economic powerhouse of the country!"

My immediate reaction was "Well, isn't that a good thing? Isn't that what you want? Would you rather be the poorest section of the country, and getting a net inflow of money because your people need it?"

It's funny how we can see things better when they're in the neighbor's yard. Isn't this the same thing as we're talking about? As a Californian, I know we send lots of money away, have more than our share of immigration problems, and eventually there will be The Big One. But I've been to Louisiana and Texas and Florida and other "net-receiver" states, and still I've lived here almost all of my life.

So unless Catalonia, or California, intends to truly separate and become a separate economy, I think we need to look at this situation as stabilizing the economy of the nation as a whole.

Thinking along further, is this also related to the balance-of-trade situation? We buy more from China than they do from us, currently, because we have a stronger economy, or currency, or whatever. As developing nations advance and become more like us, this balance will change, until it becomes more even. At that point, there won't be any need to send jobs overseas, as folks there will be earning about as much as folks at home.

What do you think?

 

[CalGalTraveler]

The stock market will be the winner. The money will be redirected to the stock market more than banks creating upward pressure on stock prices.

In addition, CEOs will buy back stocks and increase dividends to increase their paychecks given Wall Street pressures for ROI (fastest way to show results to the board and shareholders e.g. "See what I have done? The stock price increased during my tenure. This made us all richer.")

Financial manipulations work for a while but over the long term the results will be hollow and will come crashing down. Just walk through any Sears store.

 

[isisdave]

That was one example. There's stuff all over the web (and I remember nightly reports back in the day when it was "real time") of $7000 coffee pots, and $200 hammers, etc.

I am a tightwad. I won't spend $11 to go to a movie after 5 if I can see it before 5 for $8, and I think $6 wine is just fine.

I also manage a small business park. I know that when I spend Other Peoples' Money, I'm much more liberal. If I get a quote from an electrician for $500, and I think the job should cost $350, I am likely to say "oh, just do it" whereas if it were at home, I'd get another quote.

And I've been a sustaining engineer ... the guys that support discontinued products for the rest of their business life. If you add in the fact that buying the existing $650 toilet seat has a fixed, predictable cost of $650, and sourcing a cheaper one will cost six hours of your time and a bundle of annoyance, you can see why this sort of thing happens.

 

[VacationForever]

I could see this happening if rates stay low. Does anyone know whether a second home mortgage is still deductible?

Update: the California legislature introduced a bill yesterday to work around the SALT deduction cap by creating a state foundation; New York (Cuomo) is not far behind to apply same to NY state. (IMHO...not taking action would have disastrous results for homeowners in these states. We would be forced to either sell our home (at a reduced value thus affecting our eventual retirement fund) and move out of state, or do a complicated sale and leaseback of our home as a pass-thru business to get around the SALT cap which would incur unnecessary transaction costs and line the pockets of tax avoidance opportunists.)

http://www.washingtonexaminer.com/c...round-for-tax-laws-salt-limit/article/2645026

The feds "poked the bear" (LoL the California Golden bear) by pouring SALT on the wound (ahem) - the poor ROI from federal program benefits vs. tax contributions paid, makes California less reliant on the Federal Government and enables the California state government to structure its own taxes, trade laws, climate change, sanctuary cities , marijuana etc.. With a GDP greater than France, Russia and Canada, California is negotiating with other countries on its own.

If it were true that California can fix its problems and be self reliant, they would have solved the HUGE public employees pension deficit by now. Their deficit is causing increasing reduction in services across the state.

 

[VacationForever]

I am really impressed by the thoughtfulness, politeness, and consideration given by everyone in this thread. In most of my other "communities," you can't say "nice day!" without getting an argument or an insult. PLUS, I just got a deal on a last-minute rental in Las Vegas. TUG is just so great on so many levels!

It seems to me that the thing to worry about as the debt increases is that the interest we have to pay on that debt further squeezes the budget, making it harder to pay for (new) things we might need (like infrastructure, or moving the coastal cities 6 feet higher so they don't flood every year) harder without raising taxes or displacing other spending. Usually, this is like "boiling the frog" and we don't notice it much from year to year, but a sudden rise in interest rates would sure get peoples' attention. This probably won't be a problem in our lifetimes, but we can't keep borrowing forever.

The issue with CA, especially in the south, is that reservoirs need to be built to hold the water when it rains. When it rains, it floods and water runs to the ocean. California is in constant crisis of drought because it does not hold onto the water when it rains. California has huge issues.

 

[lizap]

I agree - We need this kind of dialogue at the national level. I'm happy they have not closed this thread.

 

[bluehende]

I don't understand why you think it is the federal government being unfair rather than the high-tax states being unfair. After all, it is the states with high taxes that are causing the problem you are complaining about.

The only thing I have been saying is the common comment that the high tax states are finally going to pay their fair share is dead wrong. In reality they have been paying over their fair share (see links I have posted). We can argue whether them paying more is good or bad, but at least be honest and not berate them for something they have not done. I would think if not appreciation for them subsidizing other states at least understand that they do actually do this.

I do not know what problem I am complaining about was caused by the high tax states. The only problem you may see is raising their federal taxes. I do not see that as a problem except if the reason was to politically punish a specific group. And I will say again it is not really fair to ask the people that already get the least back for their dollars to pay more, but as we can see by this thread taxes are rarely considered fair.

 

[1Kflyerguy]

I could see this happening if rates stay low. Does anyone know whether a second home mortgage is still deductible?

Everything i have read states that interest for Home Equity Loans or Lines of Credit are no longer deductible.

 

[1Kflyerguy]

The issue with CA, especially in the south, is that reservoirs need to be built to hold the water when it rains. When it rains, it floods and water runs to the ocean. California is in constant crisis of drought because it does not hold onto the water when it rains. California has huge issues.

California definitely has a water shortage. Unfortunately you can't just dam up rivers and create reservoirs without creating lots of other problems..

With the low snow pack in many years the rivers won't even fill the existing reservoirs in many years.

 

[VacationForever]

California definitely has a water shortage. Unfortunately you can't just dam up rivers and create reservoirs without creating lots of other problems..

With the low snow pack in many years the rivers won't even fill the existing reservoirs in many years.

Not true. Look at last year. Lots of rain but too few reservoirs to hold the water. It is called save for the drought days. Places like Folsom dam was letting out most of the water in fear of looding the dam, the water ran straight down the river into the sea. Southern California just lacks resevoirs.