“You can’t be for big government, big taxes, and big bureaucracy and still be for the little guy.” – Ronald Reagan
Tax cuts are in the news again. Back in 1981, when I was just a young tax geek, then president Ronald Reagan, presided over the biggest tax cut in U.S. history -- equivalent to 2.9 percent of GDP -- when he cut the top individual tax rate from 70 percent to 50 percent in 1981, right after taking office. In 1981 the economy was just a mess. Stagnant I think is the term. Much like today. However back then the inflation rate was 13.55% and a 30 year fixed mortgage would cost you 15.45%. Just imagine qualifying for a mortgage back then. I couldn’t. The light at the end of the tunnel was a train coming this way.
Reagan soon discovered that revenue needed to be increased. More than half of the bill's changes, including faster write-offs for businesses and a credit on investments, were subsequently undone. According to CBS news “the most durable effect of the 1981 cuts was to lay the groundwork for a tax reform in 1986, which was intended not to raise revenue but to clean up the tax code. In the century-old history of the income tax, the 1986 effort gets high marks from left and right alike as the only substantial effort to streamline the tax code.
"That was the last remotely aggressive effort to pare back loopholes," said Matthew Gardner, senior fellow at the Institute on Taxation and Economic Policy. "Since then we've had a gradual but continual increase in the number of loopholes."
As part of the deal, capital gains, which for most of U.S. history have been taxed at relatively low rates, were treated as ordinary income; the number of tax brackets was reduced; many tax shelters were eliminated and tax rates overall were cut.
How did the 1986 cut affect the economy? GDP did pick up over the next two years, before slamming into a wall during the 1990-91 recession. Bill Clinton would go on to raise taxes to close the growing deficit. Some economists blame the tax cut for contributing to the late-80s real estate crash, and the recession, by making it less attractive to invest in real estate. (Donald Trump made the same charge in 1991). Others say there's no connection.”
The 12 bullet point memo released last week proposes a 15% business tax rate. I assume that would cover us small business owners, as well as, very large businesses. This is a very good thing. The Financial Samurai writes “For anybody who has ever made money, you know that paying tax on your income is one of your largest ongoing lifetime expenses. A progressive tax system that taxed my income at a Federal + State marginal rate of over 50% during the Obama years was one of the catalysts for negotiating my severance and leaving the workforce for good in 2012. It didn’t feel worthwhile anymore to work 60-70 hours a week and go through so much stress for the privilege of paying the government more than I kept.
What’s even more amazing is that the vast majority of Americans save LESS than their effective tax rate! Can you imagine being taxed at a 20% effective rate when you can only save 6% of your after tax income? No wonder why so many people can’t escape the Matrix.”
Two final points from the Cato Institute to consider:
1. In a free country, money belongs to the people who earn it. The most fundamental reason to cut taxes is an understanding that wealth doesn’t just happen, it has to be produced. And those who produce it have a right to keep it. We may agree to give up a portion of the wealth we create in order to pay for such public goods as national defense and a system of justice. But we don’t give the government an unlimited claim on our money to use as it sees fit.
2. Private individuals and businesses use money more efficiently than governments do. People with their own money at risk spend or invest it carefully. You don’t find many $600 hammers or insolvent retirement programs in the private sector. Money will do more good for more people in private hands than in government hands.
Two weeks ago a client stopped by our office just in tears. Her deceased husband’s business had been turned over to an attorney for collection of a past due balance tax account by the Illinois Department of Revenue. Does she have to pay the bill?
In 2014 CEO.net ranked Illinois as one of the three worst states to do business in. Here is one comment from CEO.net, “Illinois is rated in the worst category; their taxing scheme is deleterious (harmful) toward small business.The Illinois Dept of Revenue seems most adversarial with respect to small business support and promotion.
Next month we will write to you about our answer. In short no. We will explain why. And more importantly our reaction to what happened and what you can do to help us.
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