Originally published on Forbes.com.
They just don’t do comprehensive tax reform like they did when I was a kid. Donald Trump was well established in his career when the Tax Reform Act of 1986 was implemented. Not that he actually understood it.
Jack Mitnik, my accountant, calls to discuss the tax implications of a deal we’re doing. I ask him how bad he thinks the new federal tax law is going to be for real estate, since it eliminates a lot of current real estate write-offs.
To my surprise, Mitnik tells me he thinks the law is an overall plus for me, since much of my cash flow comes from casinos and condominiums and the top rate on earned income is being dropped from 50 to 32 percent.
Art of the Deal – By Donald Trump
Mitnick Strikes Back At Trump – For Dropping The ‘c’?
You know if you are going to write a book about what a great business genius you are and mention your accountant in it, you should really spell his name right. As it happens Jack Mitnick did get his revenge for that lapse thirty years later by telling CNN that Trump really did not understand what was going on with his tax returns.
Among accountants, I know there is universal condemnation for Mitnick confirming his signature on the Donald Trump return fragments that the New York Times unearthed. Bad mouthing your former client on national TV is also something you shouldn’t do. I don’t know. Maybe when I’m eighty things will look different. Although when I think about it, Herb Cohan, my first managing partner, also disapproved of Mitnick’s blabbing about his former client.
The Good Old Days
At any rate, when the word came out that the Trump administration was announcing a major tax overhaul, I was excited and looking forward to reliving my youth. To be honest, I wasn’t actually that young. I was 32 in 1984 when the Treasury released the blueprint for tax reform that would form the basis for the Tax Reform Act of 1986. It had taken me a while to find that public accounting was my true calling, though. So I had only five years in at a large local firm – Joseph B Cohan and Associates – (JBC of which there is still a remnant celebrates its centennial this year).
Although the pace of change was picking up, the tax law had been pretty stable for nearly a generation. This resulted in a certain amount of inertia. One of the key members of the staff, often referred to in workpapers and in response to review notes was named SALY (Same As Last Year). I was kind of renegade actually looking things up, reading the instructions and then hunting down the regulations cited in the instructions. That is what I would use when I got into an argument about some fine point. There was one other guy like that who had been with the firm for over a decade. Usually people just asked him. In the hierarchy of tax authority, Supreme Court decisions, of which there are very few, are at the pinnacle. At Joseph B Cohan and Associates in the early eighties, it was “I asked Jim Carney”.
Lots Of Reading
The Treasury report – Tax Reform For Fairness, Simplicity, and Economic Growth – had two volumes. Volume 1 was an overview. Volume 2 had the detailed proposals. All in it was over 700 pages. I really dived into it. So when TRA 1986 hit, two years later I was prepared. It was great for my career because all the things that everybody knew from oral tradition were wrong. In the market space in which JBC operated, TRA 1986 almost killed C corporations as a reasonable entity choice. And then there was the phase-in of the passive activity loss rules.
The PAL rules were a real nightmare in an environment in which tax returns were still largely done by hand. And it would take many years for software capable of handling the passive activity loss rules and the alternative minimum tax. It was not that unusual to have to struggle to piece together carryovers and to see large AMT numbers that turned out to be wrong.
I sometimes regretted all the study I had done of the Treasury proposals because I would sometimes get confused as I remembered an obscure rule, that did not become part of TRA 1986.
The Essence Of TRA 1986
Probably the main thinking behind the 1986 reform was that tax effects should not rule economic decisions. The thinkers in the Treasury had some great ideas that may have been rejected because they competed with simplicity. Back in the day, there was a big concern about the way inflation distorted things. It peaked at 13.29% in 1979 but remained significant throughout the eighties and into the nineties. The Treasury proposal addressed inflation by requiring a computation to back out the inflation element of both interest income and interest deductions in computing taxable income. It also called for indexing the basis of assets. Neither of those provisions made it into the act, but I always thought they would have been kind of cool. I suspect that they would have confused the hell out of most people, which might be why they did not get into the final bill.
It seems, though, that using the Tax Code to affect behavior, rather than have it be as economically neutral as possible is politically irresistible. So TRA 1986 was kind of not only the first step in simplifying, but also the last step. Maybe that’s why the Trump plan is light on details. Whatever is passed won’t last very long, so why bother with having detailed proposals.
Tweeting The Tax Code
Earlier this week I was looking forward to the release of the plan. On Wednesday, I was hunting for the plan and sent out a plaintive email – “Is there a draft of the tax plan released online anywhere?” My source responded with”Haha, you’re hilarious. You act like there’s a real plan! ” As it turned out there was only one page handed out to reporters.
2017 Tax Reform for Economic Growth and American Jobs
The Biggest Individual And Business Tax Cut in American History
Goals for Tax Reform
Grow the economy and create millions of jobs
Simplify our burdensome tax code
Provide tax relief to American families—especially middle-income families
Lower the business tax rate from one of the highest in the world to one of the lowest
Individual ReformTax relief for American families, especially middle-income families:
Reducing the 7 tax brackets to 3 tax brackets for 10%, 25% and 35%
Doubling the standard deduction
Providing tax relief for families with child and dependent care expenses
Simplification:
Eliminate targeted tax breaks that mainly benefit the wealthiest taxpayers.
Protect the home ownership and charitable gift tax deductions.
Repeal the Alternative Minimum Tax.
Repeal the death tax.
Repeal the 3.8% Obamacare tax that hits small businesses and investment income.
Business Reform15% business tax rate
Territorial tax system to level the playing field for American companies
One-time tax on trillions of dollars held overseas
Eliminate tax breaks for special interestsProcess:
Throughout the month of May, the Trump administration will hold listening sessions with stakeholders to receive their input and will continue working with the House and Senate to develop the details of a plan that provides massive tax relief, creates jobs, and makes America more competitive — and can pass both chambers.
There you have it. A plan for comprehensive tax reform in about twenty tweets or so.
Listening Sessions Are Waste Of Time
Calling the listening sessions a waste of time might be a little unfair. They will probably make people feel good. From studying comments on tax proposals, I can tell you exactly what will be heard in the listening sessions. Russell Long explained it in 1973. What will be heard in the listening sessions is:
Don’t tax you.
Don’t tax me.
Tax that fellow behind the tree.
Oh To Be Young Again
The joy of sorting out how to reorganize client affairs in light of the 15% business rate, has me thinking about deferring retirement. Of course, we don’t know exactly how it is going to be implemented for all those S corps, partnerships, limited liability companies, and simple proprietorships. If there is not a massive change in the flow-through system as part of the reform, nobody who makes serious money is going to want to be getting a salary. Absent any detail on how the 15% rate will be implemented for those entities, it is pointless to speculate on what people will do. I do have to say, though, that rules to prevent abuse will not be simple. But maybe that will not matter much, since the Trump administration does not seem to want to fund enforcement.
Regardless, under the Internal Revenue Code of 2017, C corporations will make a big comeback. If your business is a C corporation, it pays 15%. Dividends distributed to you are taxed at 20%. When you do the math, somebody taking out all the profits is paying 32%. Somebody with a good salary is paying, at the margin, 35% plus medicare tax. And of course, the owner of a C corporation only needs to take enough dividends to live on. And then there are all the clever things like shareholder loans. Don’t get me started.
Thomas Piketty On Steroids
It looks to me like the essence of the plan is to reduce as far as possible the taxes paid by people whose income is derived from capital, particularly when you include repeal of the estate tax. If you think we have income and wealth inequality now, give it a decade or so under this new regime.
This may be on my mind because how of I have spent the last three days. I’ve been hosting Julien Icher, a project manager for the Consulate General of France in Boston. We have been racing around Southern New England documenting Lafayette’s stops on his year (1824-1825) as the Nation’s Guest. If you don’t know about Lafayette’s visit, you should read up on it. It was a national celebration of such magnitude that there is really no parallel.
At any rate, Lafayette was a key player in both the American and French revolutions. Among his contributions was the drafting of the Declaration of the Rights of Man and of the Citizen. He worked with Thomas Jefferson on the document. The part that really intrigues me is Article XII –
For the maintenance of the public force and for the expenditures of administration, a common contribution is indispensable; it must be equally distributed to all the citizens, according to their ability to pay.
We now have a President who has bragged that his success in avoiding making a common contribution in accordance with his ability to pay is proof of his intelligence. And he did learn something from good old Jack Mitnick. The centerpiece of the new proposal brings down the marginal rate he will face on most of his income to 15%.