The Big Beautiful Bill

 

      

The most important feature of the so-called big, beautiful budget bill recently passed by Congress and signed into law by President Trump was the extension of the tax reforms passed in 2017 during the President's first administration. Although not one Democrat in either the House of Representatives or the Senate voted for the bill, it is interesting to note that they did nothing to change the 2017 tax reforms during the Biden administration.

It is true that Democrat progressives always complain about tax breaks for billionaires but their inaction spoke louder than their words. Perhaps, they realized that a cut in tax rates did not necessarily result in lower tax revenues for the government. In 2016 Federal tax revenues were $3.3 Trillion. In 2020, largely because of the pandemic, they only rose to $3.4 Trillion, but in 2024 Federal tax revenues rose to an astounding $4.9 Trillion, an almost 50% increase over pre-tax reform days. Why did cutting tax rates lead to increased Federal income?

There is a difference between raising tax rates and raising taxes. An increase in tax rates on the rich or anyone else does not always lead to increased government revenues. Historically, almost the opposite has occurred. Over 60 years ago, President Kennedy lowered tax rates and Federal revenues grew dramatically. President Reagan did the same thing with a similar result after he took office.

Ironically, for conservatives it would appear that reductions in tax rates lead to increased government revenues and only enable more government spending. At the same time, it would appear that raising tax rates would actually lead to less revenue for Washington? Why should this be so?

By now it should be obvious that the lower tax rates of the 2017 Trump reform grew the economy and produced greater revenues for the Federal government. In pre-reform 2016 the $3.3 Trillion in federal revenue amounted to 17.8% of Gross National Product (GDP), while in 2024 the $4.9 Trillion federal revenues amounted to just 17% of GDP. In other words, the growth in the economy that resulted from lower tax rates, both corporate and individual, generated more federal tax revenue. 

But there is another factor. Increasing tax rates only increases tax avoidance strategies both legal and illegal. Increasing tax rates on the rich or anyone else will only encourage more tax avoidance since the potential reward gets greater. If someone’s income is taxed at a 50% rate rather than 25%, the potential reward for deferring, sheltering, or otherwise hiding income has doubled. 

No one has ever asked Hillary Clinton or her husband why they felt a need to set up the tax exempt Clinton Foundation for their charitable work. Many financial planners advise high-end clients to set up foundations for tax purposes. We all know of the Gates foundation and the Buffett foundation. Theoretically, since these foundations pay no taxes, more of their money can be used for the charities they wish to support.

There are other legitimate ways for people to shelter income from taxation. For example, taxable withdrawals from IRAs and other retirement plans can be deferred until age 70, and after that only minimum withdrawals need be taken over one’s lifetime. Raising tax rates only discourages people from taking money out of IRAs. Lowering tax rates would actually increase taxable withdrawals from IRAs and 401k type plans.

President Trump is also right about lowering the Corporate tax rate. Corporations actually don’t pay taxes. The taxes are figured into the price of what their customers pay in the same way that the real estate taxes paid by landlords come out of the rent paid by tenants. Higher corporate taxes are inevitably passed on to the consumer. People who worry that tariffs will cause inflation, never seem to worry that corporate taxes might be inflationary.

Also, corporate accountants are paid to find ways to create strategies that will minimize corporate tax liability. A higher tax rate will inevitably lead to more and more drastic measures. When states raise corporate tax rates, corporations move to more tax friendly states. Noticeable in recent years has been the exodus of corporations from high tax states like California and New York to lower tax states like Texas and Florida.

There was much more in the big, beautiful bill but I will save the discussion of Medicaid reform, SALT deductions, tips, and senior relief for another day.

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Tax the Warrens

                                             

Senator Warren and Spouse

Even before the first Democratic debate last Spring, I believed that Senator Elizabeth Warren of Massachusetts would be the strongest candidate in the large field of Democratic contenders. She shows maturity and at age 70 does not appear over the hill like former Vice President Joe Biden or Senator Bernie Sanders of Vermont, the other two candidates leading in the polls.  

Of course, the fact that Warren is a woman is a big plus in modern politics but her maturity inspires more confidence than other female candidates like Kamela Harris or Tulsi Gabbard who are both fading in the polls. Nevertheless, currently only 20% of potential Democratic voters support her. Could it be that even Democratic voters are skeptical of her proposals to tax the rich to pay for free everything for everyone else? 

The assets of Senator Warren and her husband, a long time Harvard Law professor, would appear to total more than $10 million. They own a home in Cambridge valued at around $3 Million, and a condo in D.C. worth about $800000. However, most of their assets seem to be in retirement accounts. They both have accounts with the Teachers Insurance and Annuity company with a combined value of about $4 Million.  

Ironically, these accounts are in 403b or defined contribution tax-deferred plans that left-wing Democratic leaders and public employee unions decry as inherently risky and dangerous since they are usually invested in a broad cross section of the American economy and are subject to market fluctuations. Nevertheless, most college professors and administrators have most of their retirement assets in such accounts that have performed well over the years.

 Perhaps this is why Senator Warren calls herself a Capitalist. Moreover, in true Capitalist fashion the she and her husband have chosen to shield their assets from taxation. Not only are their retirement contributions not considered taxable income each year, but the build-up in value is not taxed until they choose to make withdrawals in retirement.  In addition, the capital appreciation on their Cambridge home and Washington D.C. condo is not taxed until they choose to sell them. 

Why did they choose to defer the taxes on their earned income? Can they be blamed for not paying their fair share? I suspect that their reasons were the same as anyone’s. They were willing to save a portion of their income each year to provide for their retirement. They chose to do without the income to make sure that they would be comfortable in retirement. The government even encouraged them to do so by providing tax incentives to these plans. Who can blame them for taking advantage of the opportunity?

It is true that Warren and her husband are not billionaires, and Senator Warren is only planning to place a sur-tax on billionaires. Perhaps she and other Progressives think that billionaires have more than they need but does she and her husband really need $4 million in the stock market or a $3 Million home for a comfortable retirement? 

It will not be long before Progressives start coming after millionaires like Senator Warren. Socialist Bernie Sanders hopes to tax billionaires out of existence in fifteen years. Who will then to left to pay taxes? The wealth re-distribution proposals put forward by Senator Warren and Senator Sanders are real examples of killing the goose that laid the golden egg. 

According to government statistics, in 2016 the top 1 percent of taxpayers accounted for more income taxes paid than the bottom 90 percent combined. The top 1 percent paid roughly $538 billion, or 37.3 percent of all income taxes, while the bottom 90 percent paid about $440 billion or 30.6 percent of all income taxes. 

It is hard to say how long the economic boom caused by the income tax reform sponsored by President Trump and the Republican party will last. But for now the country is enjoying record levels of income, productivity and unemployment. Of course, Democrats like Senator Warren cannot acknowledge such achievements despite the fact that her retirement accounts have probably grown dramatically in the past three years. 

In the words of the immortal Shakespeare, “Methinks the lady doth protest too much.”

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Trump Administration Progress Report

Shortly after President Trump’s inauguration I wrote:

The true test of the Trump administration will be on how much it can deliver. If President Trump can just deliver on a third of his promises, it will be a successful Presidency. Batting .333 is good in any league. I hope commentators will begin to focus on what the Trump administration is actually doing, and not on what they fear he will do.

Little did I realize how hard it would be to find out what the Trump administration has actually accomplished. The President’s constant battles with the mainstream media, unprecedented obstruction on the part of the Democrat opposition, and the never-ending Mueller probe of Russian collusion and anything else it can dig up have obscured the real achievements of the last 18 months. 

For example, a few months ago surveys showed that “consumer confidence” in this country had approached an all-time high. Consumer confidence is an economic indicator that indicates that rising incomes are encouraging people to spend and save. Nevertheless, the media outlets I follow hardly mentioned this good sign and certainly did not attribute it to the President or his policies. 

I did read that lame duck Democrat Governor Malloy of Connecticut attributed the rising consumer confidence in his state to his own measures despite the fact that he has one of the lowest approval ratings of any governor in the country. Malloy could not bring himself to give President Trump the least bit of credit for the rise in consumer confidence even though the President’s approval rating is close to a record 50%.

The other day I watched a former director of the Federal Reserve Board (the Fed) give an interview on the CNBC show “The Closing Bell.” He was asked his opinion of President Trump’s recent criticism of the Fed. He expressed puzzlement over the President’s remarks, and said that Fed officials should just ignore them. He was obviously not a Trump partisan.

Nevertheless, he did give the President a lot of credit for the current state of the economy which most commentators agree is booming. He argued that the tax reform legislation and deregulation measures pushed by the Trump administration were the two biggest drivers of the booming economy. In addition, he argued that the President was correct in his tough trade position with China which has continually refused to abide by prior trade agreements and rules.  

Maybe the President and his administration does not deserve all the credit for the booming economy, and the rise in consumer confidence but any impartial person would have to admit that President Trump would have been given all the blame if things had gone in the opposite direction.  We have to remember that just 18 months ago the political opposition and mainstream media were predicting doom for the country and the world. Only grudgingly have they been forced to admit some progress.

Earlier this summer James Himes, my representative in Congress, informed his constituents of the passage of a bill that he had sponsored to protect senior citizens from fraud and abuse. Himes is no friend of President Trump but he did note that the President signed this bill into law. 

You will be glad to hear that President Trump signed the Senior Safe Act into law this past May after it passed the House and Senate with bipartisan support. As states begin administering these important protections, be assured that I will continue looking for more ways to defend seniors from deceit and injustice.

Earlier in the year Democrat Himes had to admit that there were many good features in the huge budget bill that the President approved with bipartisan support. Recently a bipartisan defense appropriation bill was also promoted and approved by the President.

Measures like the above are just the tip of the iceberg but they and other accomplishments are largely going unreported. The national and local media complain the President Trump is attacking freedom of the press but in actuality the press in this country has long ago enslaved itself to ideology and money. 

Here is one final example of how the media have obscured some real achievements. A little noticed feature of the tax reform bill of 2017 eliminated the income tax credit for undocumented and illegal children, a measure that would save the Treasury billions. As usual, the media screamed that this measure was robbing the poorest of the poor to benefit the rich.

In reality, the income tax credit for illegal immigrant children had turned into a scam of massive proportions. People with earnings in this country but without Social Security numbers were still required to file tax returns. These tax returns listed numerous child dependents but many of these dependents did not even reside in the country. One return showed nine nieces and nephews with only one actually residing in the USA. The billions funneled out of the Treasury in this tax credit scheme did not necessarily go to poor children. Much of it might have ended up in the hands of drug lords or gangs.

Here is a link to an Indiana report done in 2013 detailing the tax-credit scam, or just click on the video below.

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Statistics 2018

                                             

On a recent trip to India Citizen Hillary Clinton found another reason for her loss in the 2016 Presidential election. To the list that includes Russia, and James Comey, the former director of the FBI, she added White Married Women living in deplorable states that contribute little to the Gross National Product (GNP).

Perhaps forgetting her origins as a white, married woman married to a controlling husband from Arkansas, she believes that these women were influenced to vote for Trump by their husbands, sons, bosses etc. She cannot believe that these married white women could have been reasonable or intelligent enough to make up their own minds.

Clinton’s statement must mirror the feelings of many of her former fans. Her complaint about “deplorables” in the campaign only mirrored Barack Obama’s remark about people clinging unreasonably to their guns and religion in the 2008 campaign.  The idea that anyone opposed to the liberal/progressive agenda must be an ignorant, superstitious redneck has become ingrained in a large segment of American society.

People like Citizen Clinton, former President Obama, and Socialist Democrat Bernie Sanders cannot believe that reason, knowledge, and experience can exist on the other side of the political spectrum. Their more progressive followers cannot even stomach independence or moderation in politics. The way in which they shout down or even ban speakers on college campuses is just a sign that they cannot imagine that these speakers have anything reasonable to say.

To act in such a way means they must ignore certain inconvenient facts or truths. Here are some statistics on current issues culled from articles in the most recent issue of the St. CroixReview, a small independent, mid-western journal of opinion.

Issue 1: Tax cuts.

In 1980, the last fiscal year of the Carter administration, total Federal tax revenues were $517 billion. By 1988 after the implementation of the Reagan tax cuts, total Federal revenues had grown to $909 billion.  The economic growth stimulated by lower tax rates had caused Federal revenues to grow by almost 50% during the Reagan years. Reducing the highest tax rate from 50% to 28% did not cause government revenue to decline.

By 2003, the year in which the so-called Bush tax cuts were passed, total Federal Revenues were $1723 billion. By 2007 Federal tax revenues had grown to about $2568 billion although they did drop in 2008 to $2524 billion at the start of the Great Recession. Once again, economic growth had led to increased Federal tax revenue despite lower tax rates.

The evidence that lower tax rates cause Federal revenue to increase would make you wonder why conservative opponents of big government usually are the ones to favor lower rates, while liberals are the ones who oppose tax cuts. Of course, despite increased revenues federal deficits continued to increase as spending regularly outstripped income.

Issue 2:  Progressivism, Socialism, and Communism

Exhaustive studies in recent years have shown that the death toll in Communist regimes during the past 100 years has been more than imagined. The death toll in the Soviet Union during the Stalin years alone is now estimated at between 60 to 70 Million. The death toll in China under Chairman Mao was also about 60 to 70 Million. These were not war casualties but murders of their own citizens.

Although they pale in comparison with Russian and China, Communist regimes in southeast Asia, like North Korea, Vietnam, and Cambodia have also caused the deaths of millions either by famine, imprisonment, or execution. The Communist regime in Cuba, the darling of progressives in this country, is no exception. It is estimated that 100,000 Cubans have died at the hands of the Castro regime; 1000000 have fled the country, and about 500000 have been through the Cuban prison systems.

The numbers are still rising but the total deaths now attributed to Communist regimes in the past 100 years is put at 140 million. Why are these regimes so admired in progressive circles?  The Holocaust with its 6 Million dead is the subject of innumerable books and films. How many films have been made about Russia’s Gulag prison camps, or the millions who died in Mao’s cultural revolution?  Why is the murderous Che Guevara lionized on American college campuses? Even today thousands are fleeing Venezuela where the Communist/Socialist regime is systematically starving its own people.

Given these statistics, is it unreasonable to be suspicious of those who advocate a larger and larger role of government in our lives?

Issue 3: Tariffs.

In 2005 China’s share of global solar cell production was 7%. By 2012 China’s share of global solar panel construction had increased to 61%. During that period 30 American solar panel makers went out of business.  The Wall Street Journal always plumps for free trade but it is not free trade when a country subsidizes its own industries whose products, of often inferior quality,  flood the American market. After all, who cares if a solar panel lasts only five or ten years?

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Home Expenses 2017

Since I retired from my financial planning practice in 2007, I have continued to monitor the finances of one retired couple. They live in a modest ranch home in a nice neighborhood in Fairfield, Connecticut. They provide a good case study for the millions of Americans in similar circumstances. Let’s just focus on their expenses related to the maintenance of their home. The total annual housing cost in 2017 was $37482.

Principal and interest payments on a mortgage came to $20750, 55% of the total. This figure also included home insurance. Payments on a home equity credit line, used for home improvements, came to $1075. Real estate taxes came to $8650, 23% of the total. The real estate tax has been deductible from Federal income for tax purposes, but that deduction will go away in 2018 due to the tax reform bill.

Electricity costs $1499 for the year or only 4% of the total. People complain about electric bills but they seem like an incredible bargain to me given the importance of reliable electricity in every aspect of our lives. Just remember how everything shuts down in a blackout. No heat, no light, no refrigerator. You can’t even open your garage door, much less charge up your electric car or your indispensable mobile phone or device. 

The water bill was even more of a bargain. It was only $486, about 1% of the total. Not only is it clean and reliable—we only have to turn on the tap and there it is-- but it is also a vital necessity. We cannot live more than 4 days without water to drink. Moreover, we use it to wash, clean, flush our toilets, and water our lawns.

The total phone and cable bill includes TV, Internet, Mobile phone service, and a landline. It was a little under $2900 and represented 8% of the total. Yes, a landline is included for old time’s sake. In today’s world these services seem almost as indispensable as electricity and water.

The home is heated with oil and last year’s bill was $2130, or about $5.80 per day. The burner is new and very efficient but the weather and the price of oil can vary each year. Frigid weather after Christmas will probably drive up next year’s bill unless the rest of the winter is mild.  

So, for a little over $3000 per month this couple can live in a modest ranch home in a lovely neighborhood in Fairfield, one of Connecticut’s nicest towns. Of course, this figure does not include food, clothing, transportation, medical, or entertainment expenses. It also does not include Federal, and State income taxes.

Speaking of taxes, starting in 2018, the loss of the deductions for State and Local income taxes, as well as the limited deductibility of home mortgage interest, will increase the cost of housing for this couple. However, the increase in the standard deduction, and lower rates will limit the damage somewhat.

What are the housing prospects for this elderly couple going forward? Like many people over the past few years, they have refinanced their home mortgage to lock in a lower interest rate for what likely be the rest of their lives. That is a big plus to owning with a fixed rate mortgage. The lowering of mortgage rates has resulted in more savings for homeowners than any tax deduction.

Property taxes are beyond their control as they will likely continue to increase every year. At first glance it might seem that this is an advantage for renters, but increased property taxes are inevitably passed along by landlords to renters in the form of increased rent.

Their utility bills are subject to increases despite the fact that public utilities are regulated. However, looking at the past it would appear that competition is a more effective way to keep prices down than government regulation. Just look at the way the phone companies are battling one another for customers. Or look at the way the cable companies are being hard pressed to maintain their monopolies.

Other factors like old age, sickness, and medical costs might drive them and others in the same boat out of their homes. Until then, they will probably be able to maintain a comfortable, if not extravagant lifestyle. I believe that millions of other Americans are in similar circumstances. They live on a combination of Social Security, pensions, and income from savings and investments.

They will be little effected by the tax reform law. However, if the promise of tax reform comes true, the prospects for their children and grandchildren will be better. More than just keeping their jobs, they might find that higher employment will increase their income and provide them with greater job freedom and mobility. 

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