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GOP Tax Act: The Good, the Bad and the Ugly!

Finally long-awaited GOP and Trump Tax Act was published last week after last minute delay of 24 hours. What started as "biggest tax reforms this country had seen ever" campaign promise turned out to be just another GOP "give-away" to its benefactors! This is what happens when you try to govern one-sided which limits tax cuts to fit within $1.5 trillion deficit increase over decade. If only discussions included all sides the way President Reagan did with 1986 Tax Reforms, we would have seen much different proposal. I am sure you must have read many articles to try to understand your personal tax situation. So I am not going to repeat them here. You can refer to Tax Act details in article by Tax foundation.  Being a movie buff, I wanted to look at Tax Act in light of one of all time favorite movie "The Good, the Bad and the Ugly". Similar to the movie plot, the actors of this Tax Act are trying to find "fortune" in buried cache of over $20 Trillion deficit amid the chaos of DC politics! While we know who is Good (American People), the Bad and the Ugly (any guesses for who is bad and who is ugly?), let's look at some of the specifics of tax act proposals

The Good:

  • Simplifying 7 tax brackets to 4
  • Removal of AMT
  • Doubling of standard deduction
  • Increase in child tax credit to $1600
  • Territorial taxes for companies and repatriation of overseas holdings (companies would bring back trillions to USA)
The Bad:
  • Corporate tax rate cut to 20% (from 35%). While this was also good thing, such significant change would only increase company profits which are already at all time high as reflected by stock market rise. In trickle down economics, companies should pass these to workers. But that almost never happen. Reduction of corporate rates to 25-28% while balancing out reduction in individual taxes would have been "good" thing
  • Increase in lowest tax bracket from 10% to 12%. While some of this would offset due to increased deduction, the actual savings to lowest bracket is much lower than highest brackets
  • Elimination of estate tax after 6 years. This was definitely a give-away to GOP "friends and families". While gradual increase in total estate taxes makes sense, eliminating this completely would force future generations of "rich" families not work at all (this is what happens in countries like India and many other Asian and European countries).
The Ugly:
  • Cap on deduction for property ($10K) and elimination of deduction for local and state taxes. This was directly aimed at "Blue" states like California and New York and very partisan. Citizens of these states already pay very high tax rates and capping these deductions would make it worse
  • Limits on mortgage deduction to $500K of mortgage. Try buying a house in coastal states!
  • Pass thru rate for businesses - this opens up so many loopholes (unlike what was promised) that tax consultants would have a field day
  • Elimination of student loan interest deduction. This was one of the smallest savings but GOP never cared about higher education so I am not surprised that they took it out
In summary tax act proposal falls short of grand vision President Trump had during campaign. Even in size, this is one of the smallest (0.9% of GDP) in last 100 years. I am sure hectic lobbying and debates and alternate proposals must be flying in DC and final bill would change.
As in the movie, finally the Good (The People) would decide what happens to the Bad and the Ugly in 2018 and 2020 elections!




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