Let’s Talk Taxes

In an election year we see tax proposals from both parties. Will one plan work better than the other? What is in those plans and what do they want to accomplish?

One plan relies of increasing taxes to allow increased federal spending as well as using a portion of increased revenue for the federal government to pay down the national debt. What are the actual estimated figures?

We estimate the proposed tax changes would reduce long-run GDP by 2.0 percent, the capital stock by 3.0 percent, wages by 1.2 percent, and employment by about 786,000 full-time equivalent jobs.

Including the economic impacts of the tax increases, the net effect could increase deficits by roughly $3.4 trillion over the next decade.

Major business provisions modeled:

Increase the corporate income tax rate from 21 percent to 28 percent

Increase the corporate alternative minimum tax introduced in the Inflation Reduction Act from 15 percent to 21 percent

Quadruple the stock buyback tax implemented in the Inflation Reduction Act from 1 percent to 4 percent

Make permanent the excess business loss limitation for pass-through businesses

Further limit the deductibility of employee compensation under Section 162(m)

Increase the global intangible low-taxed income (GILTI) tax rate from 10.5 percent to 21 percent, calculate the tax on a jurisdiction-by-jurisdiction basis, and revise related rules

Repeal the reduced tax rate on foreign-derived intangible income (FDII)

Major individual, capital gains, and estate tax provisions modeled:

Expand the base of the net investment income tax (NIIT) to include nonpassive business income and increase the rates for the NIIT and the additional Medicare tax to reach 5 percent on income above $400,000

Increase top individual income tax rate to 39.6 percent on income above $400,000 for single filers and $450,000 for joint filers

Tax long-term capital gains and qualified dividends at 28 percent (as opposed to 39.6 percent as in the Biden budget) for taxable income above $1 million and tax unrealized capital gains at death above a $5 million exemption ($10 million for joint filers)

Limit retirement account contributions for high-income taxpayers with large individual retirement account (IRA) balances

Tighten rules related to the estate tax

Tax carried interest as ordinary income for people earning more than $400,000

Limit 1031 like-kind exchanges to $500,000 in gains

Exempt tipped income from income taxation for occupations where tips are currently customary

Expand the Section 195 deduction limit for startup expenses from $5,000 to $50,000.

https://taxfoundation.org/research/all/federal/kamala-harris-tax-plan-2024/

Will increasing the corporate income tax rate from 21 percent to 28 percent and increasing top individual income tax rate from 25.9 percent to 39.6 percent on income above $400,000 balance the proposed 2025 budget and decrease the federal deficit? Sounds good on paper. Works great on a limited model. But what is the ripple effects of increased taxation?

Increased taxes obviously leaves less money for companies to invest in businesses. Projections estimate job losses at 786,000 full-time equivalent jobs. Less money means less to invest in stock markets. How much will stocks decline? With a proposed tax on unrealized gains on stocks and real estate, how will that effect investments? How will investors react to a new 40% tax on unrealized capital gains? How will a tax on unrealized capital gains effect the average American? Will tax laws be written to place $400,000 homeowners in much higher tax brackets?

Tax on unrealized capital gains would result in an automatic transfer of funds in stock markets to the federal government. As stocks are sold to pay taxes, stock prices drop effecting every investor in the stock market, both large and small. Retirement accounts will loose money. People relying on stock investments for retirement will be hardest hit as they watch retirement funds dwindle.

Job losses result in lower wages across the board. Factor in millions of illegal aliens willing to work for lower wages. Income drops across the board and less taxes are collected. Job benefits are reduced. Prices increase to make up for higher taxes the top 10% is forced to pay. Taxes are passed onto consumers and inflation once again spirals out of control.

Common sense paints a rather bleak picture of increased taxes and history has proved the effect of increased taxes and increased government spending.

The alternative plan is to reduce taxes. How will reduced taxes help to pay off the federal deficit? Deceased taxes will have to work hand in hand with reduced federal spending. To identify a few areas where reducing federal spending is feasible the open border is the first place to look. Federal spending on illegal immigrants is difficult to gauge based on the fact the federal government is reluctant to release actual spending figures and funds drawn from federal, state, and local sources. No one has put together figures from cities, states, and the federal levels. Estimates exceed over $100 billion dollars annually for only welfare and education recipients.

Based on their use rate of major welfare programs, we estimate that illegal immigrants

receive $42 billion in benefits, or about 4 percent of the total cost of the cash, Medicaid,

food and housing programs examined in our study. However, this is only a rough

approximation due to limitations in the data.

In addition to consuming welfare, illegal immigration makes significant use of public

education. Based on average costs per student, the estimated 4 million children of illegal

immigrants in public schools created $68.1 billion in costs in 2019. The vast majority of

these children are U.S.-born.

https://budget.house.gov/imo/media/doc/the_cost_of_illegal_immigration_to_taxpayers.pdf

Another area to cut federal spending in on the ever increasing funding of wars all over the world.

FY 2022-2024 Supplemental Appropriation

As of June 30, 2024, since February 2022 the U.S. Congress had appropriated more than $174.2 billion in supplemental funding for the U.S. response to Russia’s full-scale invasion of Ukraine. The most recent supplemental appropriation was signed into law on April 24, 2024 provided nearly $61 billion to address the conflict in Ukraine, of which approximately $48.4 billion will be administered by the DoD, $11.6 billion by State and USAID, and nearly $1 billion for other U.S. Government agencies.

https://www.ukraineoversight.gov/Funding/

President Joe Biden signed a $95 billion U.S. military aid package in April allocating funding to Ukraine, Israel, Taiwan and the Indo-Pacific region. On top of that, the National Defense Authorization Act of 2024 authorized military spending of a record $886 billion.

https://www.cnbc.com/2024/05/16/how-much-money-the-us-spends-on-war.html

Military spending is a major portion of the federal budget. Wise decisions have to be made and every effort has to be initiated to ensure military spending does not result in wasted funds.

Will reducing taxes see positive results? Unlike increased taxes which result in less money to invest, cutting taxes results in an increase of funds available for investment. Which works hand in hand with proposed tariff taxes. Will tariff taxes work? There are two possible outcomes to consider.

The concept behind tariff taxes is to level the playing field on world trade. Countries often charge tariffs on goods coming into their country. Why do countries charge tariffs when that raises prices citizens pay? The concept is simple. Countries charge tariffs in the hopes manufactures build new factories in their country, often taking advantage of lower wages to produce less expensive products and expand distribution and sales volume. If companies can produce products overseas cheap enough, they can afford to pay transportation costs while selling their less expensive products in the US and other parts of the world. That plan works until the US imposes tariff taxes making the plan unfeasible. With no tariff taxes, companies build manufacturing plants in countries with lower wages and lower taxes. Increasing taxes in the US without adding tariff taxes would result in a dramatic loss in US manufacturing and jobs.

Do tariff taxes have advantages? Tariff taxes can work one of two ways. Overseas companies pay tariff taxes basically lowering the tax liability for every US tax payer. Oil is the best example based on the fact oil has always had export as well as import taxes. When the US produces and exports oil, the federal government collects taxes. When the US imports oil, other countries benefit from taxes collects. Oil taxes allow those countries to put together attractive packages to convince companies to relocate, build new factories overseas, and enjoy lower tax rates. Increased revenue from US oil exports allows the US to lower corporate as well as personal taxes making the US more attractive to foreign investors.

If companies decide not to relocate overseas and pay import tariffs, what happens? Companies invest in expansion within the US creating more jobs. More jobs means more people paying taxes. More taxes allow a smart government to pay off US debt, which lowers interest rates as well as making more money available to loan to businesses as well as individuals for home loans, auto loans, and personal loans. Tariffs are a win-win situation.

No tax on Social Security

No tax on social security effects nearly half the people collecting social security.

About 40% of people who get Social Security must pay federal income taxes on their benefits. This usually happens if you have other substantial income in addition to your benefits. Substantial income includes wages, earnings from self-employment, interest, dividends, and other taxable income that must be reported on your tax return.

You will pay tax on your Social Security benefits based on Internal Revenue Service (IRS) rules if you:

File a federal tax return as an “individual” and your combined income* is

Between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits.

More than $34,000, up to 85% of your benefits may be taxable.

File a joint return, and you and your spouse have a combined income* that is

Between $32,000 and $44,000, you may have to pay income tax on up to 50% of your benefits.

More than $44,000, up to 85% of your benefits may be taxable.

https://www-origin.ssa.gov/benefits/retirement/planner/taxes.html

Based on the fact the average check is $1,783.55, according to the Social Security Administration, that equates to an annual income of $21,402.60. Which is a little over poverty level.

2024 POVERTY GUIDELINES FOR THE 48 CONTIGUOUS STATES AND THE DISTRICT OF COLUMBIA

Persons in family/household Poverty guideline

1 $15,060

2 $20,440

3 $25,820

4 $31,200

https://aspe.hhs.gov/topics/poverty-economic-mobility/poverty-guidelines

Average Social Security payments places the average family of 2 living off a single Social Security check $962.60 annually above poverty level.

How will new taxes on social security effect the economy? With runaway inflation the effects will be devastating. Housing and food price increases will force seniors to make hard decisions.

What will no taxes on social security do for the economy? It certainly will make life easier on senior citizens. It will also pump money into the economy. A large number of seniors saved for retirement with plans to spend their money on vacations, updated housing, new cars, and a host of other products to enjoy retirement. Seniors prefer to leave their nest eggs in their investments and accumulate interest. If taxes are introduced on unrealized capital gains, seniors will be taxed on both ends being forced to withdraw investments just to pay taxes. Talk about my body my choice. New taxes are designed to force seniors into decisions they had not planned on making.

If social security was not taxed, more money will be spent on travel, expenses related to travel, meals, and included with those meals, tips. The wealth is spread around in countless ways. But not if the federal government decided to make decisions on how retired Americans should spend their money.

No taxes on tips. Can that help the economy? As a rule of thumb, tips are based on the quality of service. The average American agrees, the government should not profit from personal decisions and freedom of choice when it comes to gratuities. Additional income for people relying on tips results in additional funds instantly entering the economy. The majority spend on consumable goods with portions reaching the investment market. Additional funds in the way of tips helps small local businesses as well as adding to stock market investments.

Take a step back to examine the total picture of no tax on tips. People benefiting the most are of course people with the highest work ethics dedicated to providing outstanding service. Those people will have an increased income spent in local stores. Of course people with the highest work ethics will spend their money at businesses with the same standards which will raise the quality of service and ethics throughout the local community. The plan is genius.

The extra tax collected from tips being spent and redistributed in the economy will never pay from revenue lost by not taxing tips but there is another part of the plan that will more than make up lost revenue.

Increased oil drilling will result in lower gas prices as well as decreased energy prices across the board. Consider the fact, federal taxes on gasoline remain at a constant level. Lower gas prices results in more driving and more gas sold at the pump, resulting in more than enough increased revenue from gas sales to make up for no tax in tips.

Increased taxes is a disaster in the making with ripple effects that will quickly spin out of control resulting in inflation and job losses. Lowering taxes and increased tariffs results in increased US production, job and employment growth, as well as increased sales, increased sale taxes collected at state and local levels, and if well organized and run at state and local governments levels, decreases in real estate and other taxes.