Tax Act Overview
The Tax Cuts and Jobs Act of 2017, which we will simply call the “Tax Act”, is not retroactive except for a very few unique expensing provisions, so for nearly everyone, your upcoming income tax filing due this spring for the 2017 tax year filing will NOT be effected. However, the changes are more significant than most realize, so now is the time to implement tax planning for 2018 to optimize the greatest tax advantages for your 2018 income tax filing. Below you will find a quick rundown of a few of the significant changes for both individuals and businesses. Be sure to visit our website for a slightly more comprehensive picture.
Also, be aware that many of provisions of the Tax Act are temporary and thus will revert in the future unless Congress takes action to make them permanent. Most of the individual tax changes expire December 31st, 2025. We recommend you contact your Congressman and encourage them to address the temporary nature of much of the Tax Act now. List of Congress members.
Finally, keep in mind that some of the old tax law provisions are grandfathered or may phase in after 2018; to clarifiy, some of the new tax provisions only apply to actions or transactions made starting in 2018 or may not start until after 2018.
Individual Tax . . . the more comprehensive picture of the Tax Act.
Business Tax . . . the more comprehensive picture of the Tax Act.
The Tax Act itself . . . . a direct link to the actual full language.
Tax Act for Individuals – for details visit the links above
- Tax rate – for most it is being reduced (Learn More)
- Tax brackets – for most the brackets are increased (Learn More)
- Standard Deductions – Nearly Double (Learn More)
- Schedule A – Many Itemized Deductions are eliminated (Learn More)
- Mortagage Interest – limits on indebtedness level deductible (Learn More)
- Child Tax Credit – Increase (Learn More)
- Alimoney – No longer deductible (grandfathered) (Learn More)
- Estate Tax – Limit increased to $22.4 million (Learn More)
- AMT – Increased exemption amount (Learn More)
- ACA – Repeals individual manadate penalty (Learn More)
- UNCHANGED – Dividends and Capital Gains (Learn More)
Tax Act for Business – for details visit the links above
- Corporate Tax Rate – Graduated 15% and 35% removed; now 21% (Learn More)
- Passthrough Deduction – New deduction; up to 20% for certain small business incomes (Learn More)
- Bonus Depreciation – Up to 100% (Learn More)
- Real Property – Reduce REcovery Period (Learn More)
- Section 179 Expensing – Increased and qualified real property definition expanded (Learn More)
- Business Interest Deduction – New limit of 30% of adjusted taxable income (Learn More)
- 1031 Exchange – Now excludes property held primarily for sale (Learn More)
- Excessive Employee Compensation – exceptions to compensation over $1 million repealed (Learn More)
- Loss Carry Back – Repealed in most cases (Learn More)
- Corporate AMT – Repealed (Learn More)
- Domectic Production Deduction – Repealed (Learn More)
- Entertainment Expenses Deduciton – Disallowed in most cases though meals remain (Learn More)
Today, we never think twice about using an ATM, but sooner than you might have expected, you may see the use of similar “automatic” kiosks in various industries such as fast food. And while technological replacement of labor is not a new thing or a bad thing, government manipulation of the economy is a bad thing. In this case, government’s economic manipulation will have the most dramatic negative effects on those whose plight some argue a minimum wage will help, including minorities and the poor. Not unlike the plight of the “buggy whip makers ” addressed in Theodore Levit’s 1960 Marketing Myopia, technology may soon replace vast numbers of entry level positions. However, today it will not be in one industry where persons can simply be “retrained”. Today, government is essentially seeking to remove the first rung of employment entirely. How?
The Fair Labor Standards Act was established in 1938 and set the minimum wage at 25 cents an hour. Initially, minimum wage law was established to “push out” immigrant workers, women, and minorities. The idea was that businesses would be unwilling to pay these persons the higher wages, and this would push these workers out of the labor force and mainstream society completely. While the objective of the initial labor reformers is morally wrong, the outcome they sought to achieve is accurate. Thomas C. Lenard, professor of economics and history at Princeton says, “If they were right, and a $15 per hour minimum by 2022 proves to be too high too fast, the workers who will lose their jobs will disproportionately be people of color, immigrants, the disabled and women — the very people labor reformers vilified as low wage threats a century ago.”
Today, who will be effected by such a big jump in the minimum wage? Unfortunately, workers without alternatives are the individuals who are most often injured by an increase in the minimum wage. Typically, a person who is committed and hardworking at their minimum wage rate will receive small raises over the years. When the minimum wage is raised, it effectively wipes out the raises and recognition these workers have earned. Now, their effective income will go down as the cost are distributed from the employers and passed on to the consumers. This means that the cost of living will rise at a faster rate than the minimum wage, making those people earning minimum wage go deeper into poverty.
Another thing to considers is how small businesses will handle an increase in the minimum wage. Some small businesses will be unable to compete by raising their prices. This will cause these small businesses to go out of business. Now, instead of their employees making “more” money, they will be making nothing.
There is an interesting phenomenon occurring in 2016. For the first time in history, the top 1 percent of the population will have more wealth than the bottom 99 percent. This video posted to the Economist Facebook page shows a graph highlighting the change in position of the top 1 percent versus the bottom 99 percent over time. The narrator claims that 2016 will be a more unequal world than ever before. While this may sound alarming, it does not necessarily indicate that times are tough for the bottom 99 percent.
The above graph shows the number of people living in absolute poverty and the number of people not living in absolute poverty. As you can see, the number of people not in absolute poverty is rising, while the number of people living in poverty is shrinking.
So how can both of these things happen? As long as the total wealth of the world increases, it is possible for the amount of people living in poverty to decrease and for the inequality gap to increase.
One way to look at this is to consider the fixed pie fallacy. With a fixed pie, for one person to get more of the pie, someone else has to get less. Traditionally, people view wealth in this same way. They assume that wealth is a fixed amount, and for one person to make more money, someone else has to make less.
However, this is not the case. Instead of taking more slices of the same pie, the pie gets bigger as the total wealth increases. So now, even though the top 1 percent is making more, the bottom 99 percent is also making more. Think of it as having the choice of a small slice of pie from a gigantic pie, or a larger slice from a microscopic pie. In the case of the gigantic pie, everyone receives more.
Today, a great portion of our society puts a large value on equal outcomes and the morality of considering our fellow man, but are equal outcomes really the best way to develop a moral society? Karl Marx, Immanuel Kant, and others argue that individuals cannot be trusted with their own self-interest, but how are we, as a society, to find individuals with no self-interest whatsoever? In a discussion between Milton Friedman and Phil Donahue, Friedman outlines that there is not a moral means on which to construct a system of societal structure better than capitalism. He argues that even in socialist societies, people are not rewarded for their virtues. He also argues that societies are not progressing because of mandates from the government, but by individuals pursuing their own self-interest. This leads to man serving their fellow man, instead of the government supporting their fellow man. To hear Milton Friedman’s full argument on the differences between socialism and capitalism, watch this short three minute video.
Walter Williams argues that it is more moral for people to serve their fellow man and earn a claim on what he produces rather than to do nothing and still receive a claim on what is produced. He also says “The free market calls for voluntary action between individuals. There’s no coercion. In a free market, if I want something from you, then I have to do something for you.” In a capitalist society, if people are happy with a business and continue to support it, the business will grow and thrive. If the people are no longer pleased with a business, they can stop giving their money to the business, and it will naturally fail. Walter Williams outlines this well in this educational five minute video.
For a more in depth look on the moral defense of capitalism from Ayn Rand, who developed the philosophy of Objectivism, watch this 38 minute video.
Recently, the Washington Post published an article wherein a connection was drawn between recent improvements in living standards for Cape Verde and recent efforts to build more roads. While there is a correlation between the development of new roads in the country and a decrease in the poverty level, it is hard to believe that infrastructure has brought Cape Verde out of poverty and into prosperity.
One must be careful in any discipline about looking at correlations and assuming cause and effect; finance and economics are no different. In fact, there are some spurious correlations, which one can only muse at even considering causation.
But if infrastructure is not the cure to poverty, then why has Cape Verde seen living standard improvements in recent years compared to other African countries, such as Liberia? One theory would be to look at how their governments operate. While both countries are considered democracies, the government in Liberia has significantly more corruption than the government of Cape Verde. This corruption adds a great deal of unnecessary cost to many products, which causes many citizens of Liberia to be unable to afford basic needs. In Cape Verde, there is not only less corruption, there is also more economic freedom. This allows for free trade to occur, which in turn produces more affordable products. In fact, Cape Verde’s economic free trade levels are rising rapidly, exceeding other African nations and even meeting the economic freedom of the United States, which is falling. And what about the infrastructure correlation? What we find as more plausible is that those infrastructure improvements were made as a result of the economic prosperity of the individuals. This is because all wealth is built in the private sector; government merely reallocates and redeploys that wealth.