We are seeing headlines about tax rate changes. If you are like most people, you’re wondering what’s in it for you?
What does the new tax plan mean for entrepreneurs and small business owners?
The reality of the final bill rested in the hands of just six people. They are White House Economic Counsel Gary Cohn, Treasury Secretary Steven Mnuchin, Speaker of the House Paul Ryan, House Ways and Means Chair Kevin Brady (from The Woodlands), Senate Finance Committee Chair Orrin Hatch, and Senate Majority Leader Mitch McConnell.
That is, after 435 House representatives and 100 Senators, having been lobbied by over 11,000 registered lobbyists from various special interest groups and correspondence from their constituents, have attached amendments that created bills passed separately by both House and Senate.
I’ll cover specific changes for businesses in part 2, but today I’d like to share my experience as an adult in watching tax rates change over the last 50 years.
Past Tax Plans and Highest Rates
|Year||President||Highest Income||Tax Rate|
|2003||G.W. Bush (43)||$311,950||35%|
These are only 7 data points from the IRS individual income tax rates, showing the taxation rate for the highest income brackets. I use these as examples of a recurring pattern.
Rates change, as well as what it takes to be in the “highest” income bracket. Consistently the allowance for deductions has been reduced (same as the Trump tax simplification) and the “rich” has been modified based upon economic conditions at the time.
Of most interest to me is the amount of the economic pie that the government collects: no matter the rate or the highest tax bracket, that amount has hovered in the 18% range of gross domestic production (GDP).
What always amazes me is how little attention is given to the spending side of the equation. The crafters of the bill are focused on remaining “revenue neutral” meaning that the government will still get its share of wallet to provide solutions to the country.
Why not have a trigger that says if there is a deficit of X amount, government will have to spend less? You have to do that with your own budget, don’t you?
In my experience, the period when we came the closest to a flat tax (Reagan 1986), individuals did a good job of deciding where to spend or invest our money. Between 1986 and 2000, the S & P 500¹ total compounded return was 16% per year. (Note: that doesn’t mean that EVERY year was 16+%. In fact, 1990 and 2000 were negative years).
During the preceding period (1971-1985), the S&P 500 compounded in the 10% range with 4 down years (73,74, 77, and 81). Tax rates bounced around during this period from 70% to 50%.
My observation is that freedom of choice for taxpayers results in more favorable returns. The stock market, of course, is only one measure of how the economy is doing.
More recently, looking at 2001-2016, compounding of the S&P 500 was at just over 5% with down years of 2001 and 2002 with a big negative that we’d all like to put behind us—2008.
Since the founding of our country, there has always been a push/pull debate about how much the government should take in and what it should do with the money it receives.
In 1879, Abraham Kuyper established a new political group called the Anti-Revolutionary party. He said,
“Reliance on central government begets a slow process of dissolution that cannot but end in the demoralization of government and people alike.”
Source: “Kuyper’s Manifesto,” World Magazine, Oct. 14, 2017 edition, page 64.
My hope is that the six who will decide what simplification means keep the Kuyper’s Manifesto in mind. Trying to deal with all these moving parts alone is a challenge for individuals. Just remember when you put “THE” and “IRS” together, it spells “theirs.”
Creating a positive business climate with fewer regulations and more permanency in tax rates helps create an opportunity for the economy to grow.
Helping businesses know what to expect in coming years allows them to make longer-term projections without the uncertainty that tax changes can bring.
I’ll continue this discussion in Tax Law Changes part 2 – The New Tax Plan.
¹ Use of the S&P 500 is only one way to measure the economy. The returns cited do not take into account any fees you may incur as an investor. Your personal experience may be more or less for these time periods based on a variety of factors such as the time you invested and when you sold. You cannot invest directly in the S&P 500 index. This is not a recommendation or a solicitation for any investment.
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