My father used to tell me to believe half of what you see and even less of what you hear. When it comes to what people in Washington or in the media have to say about tax policy, that's usually pretty good advice. Now that we have more than a rough …
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My father used to tell me to believe half of what you see and even less of what you hear. When it comes to what people in Washington or in the media have to say about tax policy, that's usually pretty good advice. Now that we have more than a rough sketch of the new GOP tax plan, I decided to dig in and check it out. I'm glad I did.
Since my first days as an attorney, fresh from USC Law, I have worked as an attorney specializing in taxation. I've worked for U.S. corporations doing business around the world, and earlier in my career I worked for the House Ways and Means Committee, where tax law originates. That experience has allowed me to have a bit of a bird's-eye view on this bill, where it comes from and how it might affect families and small businesses all across South Carolina.
There's no question that tax reform is necessary and long overdue. I support tax reform - who doesn't? There are some aspects of the Nov. 2 tax bill that could make sense and carry meaningful benefits. That said, the plan as currently drafted is flawed in several respects, most of which boil down to this: the primary beneficiaries of the proposed changes are big corporations and people who are very, very rich.
Now, some details.
Doubling the standard deduction. The GOP proposal would double the standard deduction for individuals. Increasing the standard deduction would, if that was the only thing done, reduce taxes for individuals. The child tax credit would also be increased. However, in addition, the GOP bill eliminates personal exemptions and changes tax bracket thresholds. The new GOP individual tax brackets would start at 12 percent (now 10 percent under current law).
It's important to make this point clear: Not everyone's tax bill will be decreased by the GOP tax bill. The combined effect of these changes could cause some folks with a large number of dependents to have a higher tax bill. A lot of folks who could use a break will see their tax bill go up.
Lowering the corporate tax rate and overseas income. The GOP tax plan would cut the statutory tax rate on corporations from 35 percent to 20 percent. That said, the effective (i.e., the real world) tax rate paid by large corporations is much lower than the 35 percent statutory rate already. Even by the reckoning of the GOP, this reduction would add nearly $1.5 trillion (that's 12 zeroes) to the national debt.
The GOP bill would also change the taxation of overseas corporate income. The many trillions of dollars in untaxed corporate earnings stashed overseas is a real problem that needs to be dealt with. To its credit, this issue has been acknowledged by GOP's plan. The challenge of dealing with income stashed overseas is how to tax it when brought back to the U.S. The GOP plan would impose rates of either 5 percent or 12 percent (depending on the type of overseas income).
We will need to debate whether 5 percent or 12 percent rates of tax are appropriate when compared to the rate such income would otherwise been taxed at a 35 percent rate or the proposed statutory rate of 20 percent. We should be realistic about finding the balance between taxation rates that will result in an influx of new money into our domestic economy and those that are just a giveaway to big multinational corporations.
Non-corporate business income to be taxed at 25 percent. Instead of being taxed at individual income tax rates, under the GOP plan, business income would be taxed at a 25 percent rate. This would create substantial incentive for those individuals whose income would otherwise be taxed at higher rates on wages to "shoehorn" into the 25 percent non-corporate business tax rate. The IRS has a tough job already. Having to police this would require a massive increase in the size of the IRS bureaucracy if it is to be successfully enforced at all and further complicate our overly complex tax rules.
The Alternative Minimum Tax (AMT). The AMT, which the GOP plan would repeal, exists to ensure that the wealthy pay at least something in taxes. It was created after Treasury Secretary Joseph Barr informed the public that 155 wealthy individuals had paid no federal income tax in 1966. This lit a fuse, and public pressure was brought to bear for Congress to fix this. More letters were sent in 1969 to Congress about the "untaxed 155" than about the Vietnam War. Congress acted and came together to create a minimum tax to prevent wealthy individuals from taking undue advantage of special tax deductions and tax credits to eliminate their federal income tax liability. In short, without the AMT, some ultra-wealthy would pay little or no tax at all.
The same conditions that led to the AMT's enaction still exist today, and President Trump knows this well. We know from President Trump's own 2005 tax return that he would have paid $31 million less in his 2005 taxes without the AMT. Without the AMT, President Trump's federal income tax rate would have been a bit more than 3 percent, but with it he paid a 25 percent rate.
There is a continuing need for the AMT to ensure the ultra-wealthy pay their fair share. The AMT should be improved, not repealed. First, it should be indexed to inflation so it only applies to the wealthiest Americans - the AMT can now affect non-wealthy families, so that needs to change. Second, even though some of the wealthiest Americans derive their income from dividends and interest, the AMT currently excludes those two categories in its calculation. That also needs to be fixed.
Estate tax. The GOP tax plan would abolish the estate tax entirely by 2024. The fact is, the estate tax is one of the most progressive and least intrusive federal taxes. A 2015 report showed that 99.82 percent of estates owe no taxes at all. IRS data shows only 4,700 estates (or the richest 0.18 percent of all estates) owed any estate tax in 2013.
Contrary to some Democrats, I believe there is merit to reforming the estate tax so that family farms and small family businesses are not hit by the estate tax. Family farms are the bedrock of rural America, and small businesses are the vital threads in the fabric of our national economy. I would support an increase to the estate tax threshold, but it should not be completely repealed. Tax reform should reflect our rural and entrepreneurial values.
Bottom line. We must be vigilant and not let the GOP tax plan be a Trojan horse that appears to help the many when in actuality it primarily benefits the top 1 percent.
The tax code should be an extension of our moral code - it should enable good jobs, secure families and a fair shot at a better future.
Editor's note: Archie Parnell recently announced he will again seek election to the U.S. House District 5 seat in 2018.
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