This is an ongoing story and the Senate is expected to act on its tax bill this week. What that bill looks like in its final form is still up in the air. However, the basics of the plan will remain the same and will remain close to that passed by the House which still makes this interview relevant.
It’s President Trump’s tax plan but at the same time it belongs to Republicans in the House and Senate. We’ve been hearing and reading about it for a year and now it’s starting to happen.
Exactly how the plan shakes out is still anybody’s guess.
That said, the House and Senate plans have some differences but overall, they’re close enough to the same to not have to compare for the purposes of this story. You know what politicians have to say about the plan and you know what conservatives and liberals all have to say.
Weekly Industry News (WIN) decided to take the story in a different direction and we reached out to Stephan Sykes. He’s a Certified Public Accountant (CPA) and the owner of Plus/Minus Accounting in Oregon City, Oregon.
His firm specializes in:
• Tax and accounting services
• Bookkeeping services
• QuickBooks services
• Business advice and consultation
We asked him a number of questions about the plan(s) and began with why do we need tax reform?
Stephan Sykes: Think about it. Four brackets is better than seven. The lowering the tax rate is good. Getting rid of the AMT and the estate taxes is just wonderful. Lawyers and accountants say no to doing away with them because they generate income but they are two items that don’t generate revenue and just add complexity.
WIN: What are people asking you about tax reform?
SS: Are my taxes going to go up. That’s the first question I hear. Question number two. Is there anything I can do now so that won’t happen?
The answer to question number one is no, they’re not going to go up. Raising taxes will tank the economy and the stock market will explode. We’ll see a 20,000 point drop in just a few days.
Number two, there is no way to prepare for something we don’t know is going to happen.
WIN: The complaint we all hear from the Democrats, the progressives and liberals in general is that this only benefits the rich and is boon to corporations and the rich. Is that true?
SS: Yes with a caveat. The top 20% pay more than 80% of the taxes. If you’re going to have a tax cut then 20% of the people paying 80% of the taxes are going to want a cut. Somewhere around 40% pay 0%. How can you give them a tax cut? They don’t pay any tax. If the top 10% or 20% — whatever that number is — pay 80% of the taxes then they are going to, of course be the only ones getting a benefit.
WIN: So this is basically trickle-down economics?
SS: Trickle down has always been a fact of economic life. Land, labor and capital has to be put to use. If you inhibit that just because someone is rich then you’re inhibiting the economy.
WIN: Many of the members of the PIA Western Alliance and many independent insurance agents in general are small businesses. This bill hurts pass through companies and some are very emphatic that this is bad for small business.
SS: Yes, that’s correct. It is bad for small business since 80% of all businesses are S Corps. They’re going to take a big hit. However, as an accountant, the first question I always ask when people talk taxes or tax reform is where is the loop hole? There is one here and it’s that you’ll want to convert your S Corp — or your pass through entity — into a C corporation.
If they lower the corporate tax rate, and if they lower capital gains, or more importantly, if they put zero tax on dividends, that will be great for small business. If a business doesn’t convert to a C Corp then they will pay substantially more. In fact, they’ll pay about 15.3% more because they’re going to make it subject to Social Security tax.
If you have $100,000 pass through income then $15,000 is what it’s going to cost. Right now it’s zero.
WIN: Small business groups oppose the S Corp — or pass through business — part of the tax reform proposals in both the House and the Senate.
SS: Yes and it has very little chance of passing as it sits now. There are so many special interests up against this one that it won’t survive. Not only is it bad for real estate but it’s bad for every S Corp in the United States which — as I noted earlier — is 80% of all businesses.
WIN: So the best solution for the S Corp proposal is to not do it at all.
SS: Yes, just leave it alone and leave it as it is now. It works. It’s the law. We know what to do. We know what not to do. Let’s just leave it alone.
In my opinion the pass through business changes may be an attempt to fix Social Security. They’re talking about taxing rental income and make it subject to self-employment taxes and Social Security taxes. Right now it’s just subject to ordinary income tax. It’s not earned income but if they do reforms this way you’ve got an automatic 15.3% hit.
I don’t think they can do it that way because there’s too many vested interests in pass through income not being subject to a payroll tax.
WIN: Are the tax reforms being proposed good for the country or not?
SS: If they do the business side, the corporate side, and quit focusing on the rich, I guarantee you’ll see the GDP go up 5%. You’ll see the stock market go through the roof because it’ll make us competitive for the first time in 30-years.
We have a 35% corporate tax rate. That is one of the highest in the industrial world. Ireland is 12.5%. If the Republicans lower that rate to 20% you’re going to see businesses flooding back into the United States. This will happen even though other countries may still have a lower tax rate.
Why? Because we have so many advantages in this country like our infrastructure, our labor force, etc. We’ll have businesses rushing back faster than you can count.
Even better, if they take away the repatriation tax we’ll have trillions flowing back because if you’re going to invest your income here instead of Ireland or some other country.
And — as just noted — at 20% there are other benefits that people just don’t take into account. Let’s face it, you’re closer to one of the largest consumer markets in the world. We have transportation benefits, we have stable contract law, a stable financial system; we’re strong, competitive and if they make us even more competitive by getting out of the way via the regulatory burden and with lower corporate taxes and some of the stuff that is forcing capital off shore, the Republicans will look good and Trump will look like the best president since Washington.
Again, I think you’ll see us reach 5% growth in the GDP if this passes.
WIN: But there isn’t a corporation in this country today who pays even close to 39% in taxes.
SS: Though we weren’t taught this in school, always, always remember corporations don’t pay taxes. If the government says give me 20-cents then business just adds 20-cents to the cost of the product. Or they don’t give employees a 20-cent raise. Or they won’t invest.
And if they can’t do those things, they’ll move their factory to China.
So corporations don’t pay taxes. Only people pay taxes. On all articles written about corporate taxes it should be required that the author say, “Remember, corporations don’t pay taxes. People do.”
As an example, Chevron — and let’s just put a mythical number on it — didn’t pay $3 billion in taxes last year. When you and others went to the gas pump, you paid it.
A tax is just a cost on land, labor or capital. Anytime you lower the cost of capital you’re going to see economic activity. It’s been going on for 4,000 years. People will engage in economic activity when they’re left to their own devices. Let’s just not make it so expensive.
WIN: What does this do for job growth?
SS: It’s going to create more jobs than we’ve ever seen, and is going to unleash capital in areas that haven’t even been invented yet like the Uberization of the economy. Even better put, it’s going to be hyper-Uberization and it’s going to make all of us better off.
WIN: What about the property tax deduction and the mortgage interest deductions that will disappear if this passes?
SS: The property tax deduction and the mortgage interest deduction are not going away. There are too many vested interests. Republicans might put that on the table just so they can get some blue state votes. They might say, “Hey, we’ll pull this out of the bill along with the state income tax if you’ll vote for this.”
That would be a great strategy because a lot is being said about the state income tax deduction loss being terrible for high tax states: New York, New Jersey, Illinois, California and — of course — Oregon.
WIN: We know your views as a CPA. What do you personally think about the reforms?
SS: I’m warming to it. At first I didn’t like any of it but now I’m starting to see comments in some of the accounting chat rooms and some are saying it’s one of the best things we’ve seen since Reagan. I think we’ll see 5% growth in the GDP.
WIN: Liberals hate that this is being compared to Reagan and point out that equating this with Reagan means we’re going to add to the national debt.
SS: The problem with Reagan’s cuts is that spending went way up, too. The economy took off like a rocket but they [Congress and Reagan] spent it all.
WIN: Does this version of tax reform do the same thing?
SS: Well, if they’d cut spending way back that would help even more. If they did both tax reform and spending cuts — wow.
WIN: What’s the negative?
SS: My worry is too much political infighting and that they come up with some kind of a compromise that hurts us. That could happen. Right now the soft spot is the animosity toward Trump. It is at such a high level that we might see people fall on their swords just so they can say they hate Trump.
What is different with this issue when compared to the attempt to do away with ObamaCare is that we will likely see some up-for-re-election Democrats cross over. This is where this is different than ObamaCare. They want to get re-elected and they don’t want to get left in the dust on this.
WIN: Last, how good is this for the consumer?
SS: It’s no change for the consumer. It’s not tax relief. It’s tax reform. We’re not getting tax relief as in lower taxes but they are changing the deck chairs in the tax code. For example, if I take away my dependent exemptions but I double the standard deduction It’s a wash for a lot of people but no real change.
Stephan Sykes is the owner of Plus Minus Accounting in Oregon City, Oregon. He can be reached at 503-594-2895. His website is at https://plusminusaccounting.com/firm/about-us.