THE LATEST THINKING
The opinions of THE LATEST’s guest contributors are their own.
Taxation is inherently controversial. The new law is no exception. Only one thing is certain: the changes will amount to one great experiment.
“America is God’s great experiment,” the local physician in our rural Southern town once said.
After immigrating to the U.S., he and his wife, also a physician, opened and ran what was at times the only medical clinic in our town.
Their story is the American dream, and there is a great wisdom in his viewpoint, which offers valuable insight into the American project. I was reminded of it when reading about the new tax law. I thought about the spirit of his comment. I thought about the American spirit of experimentation.
While no one can know what is always best for the economy, there is a solution to what ails us. It’s recognizing that if things are not working right, we can try something new.
Among the changes coming with the new tax law is the cut to the corporate tax rate from 35% to 21%. This will result in fewer taxes paid by corporations to the federal government. But, the new law also reduces the amount of interest on debt those corporations can deduct from their earnings (capped at 30% of those earnings), which will increase the taxes they pay. The net effect, however, is less taxes paid by corporations.
Concerning individuals, if you took out a loan for more than $750,000 to buy a house, the interest on anything above $750,000 can’t be deducted from your taxes. So, under the new law, those homeowners will pay more taxes.
Also, state property taxes beyond $10,000 will no longer be deductible from federal taxes. So, if you live in a neighborhood where you pay lots of property taxes, you will no longer be able to deduct all those local taxes from your federal taxes.
That's all to say that corporations will send a smaller percentage of their earnings to the federal government, and people in homes worth more than $750,000, where property taxes are typically high, will send more.
Taxes are economic levers for the marketplace. They also raise revenue for government services. But, equally important, they incentivize companies, and individuals, to do or not do certain things with their businesses and investment capital.
There are standard academic talking points on what the results will be from the "levers" we’ve pulled. But, predicting all the effects of taxes on our economy at any given time is impossible. The best we can do is try something and observe the outcome.
The last real tax reform was passed before the internet as we know it. It’s time to experiment. But its controversial, and under the new law the upper middle class is being asked to shoulder the burden. Taxation is like economic warfare. Some people are on the front lines, others aren’t.
There will be reversals, and sunset clauses, and loopholes, and lawsuits, and case law, and disappointments and unexpected windfalls. But, we are doing something.
What will the lasting effects will be? No one knows. And that is the beauty of this great experiment.
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