There were two reasons I became a CPA. First, I wanted to be able to support myself and a future family. Second, I was always involved in politics and our public policy is run through the tax code. At this point, I think I am fairly qualified to analyze any proposals by the candidates.
For overview purposes, Mr. Trump wants to allow people to keep their own money and spend it how they judge fit. This is very much in line with what he did in his first term. Ms. Harris wants to direct her public policy interests through collecting more taxes and then providing targeted tax credits for government to accomplish what she believes are the “desired” goals of the government.
Let’s look at some of the proposals. Most have been outlined in broad strokes by the candidates.
First, the proposal for no tax on tips. This was proposed by Trump and promptly joined by Harris. In fact, there was even a proposal to pass something through the current Congress which quickly died. Here is how I see it.
Tips were initially taxed in the first Reagan Tax Act in 1982. There is some clear logic in that tips are an established means of compensation. Over the years the IRS has increased regulations on tip reporting to capture more of the income at known tipping locations like restaurants. It has created quite a bureaucracy tracking and reporting the income. If tips were not reported as income it would lessen the bureaucracy for many employers.
The downsides are three: 1. Less revenue for the government, but many people who receive tip income pay little or no income taxes already. 2. People earning tips would not be paying into social security and Medicare which will harm them later in life providing smaller or no benefits. 3. Some people make a very nice living from their tipped income approach often exceeding $100,000. For this to work for everyone, my belief is that they could exempt tips from income tax, but not social security or Medicare. Also, at a certain level of income the tipped employees would not be exempt.
Another Trump proposal is no tax on social security benefits. Reagan initiated this tax in 1984. People have commented not taxing these benefits would harm the social security system. If people started taking benefits earlier because the benefits were not taxed that might increase outflows from the fund, but I see that as a minor problem.
The reality is this tax is not going to be eliminated. But it can and should be adjusted. Since 1984, more people are living longer and working longer. Facts on the ground have changed so an adjustment as to when taxation kicks in and at what rate is justified. Some people are choosing to work longer because they want more assets over their final years with a better lifestyle while living longer, they should not be economically harmed by their own government regarding a retirement program in which they are forced to participate. This program does warrant evaluation, and Trump is right to bring it up.
The third proposal Trump has made is to eliminate the cap on deduction of state and local taxes often referred to as SALT (State and Local Tax Deduction). This was put in place by Trump because residents in certain high tax states were fully deducting their taxes. It was thus perceived that people in the low tax states were subsidizing the high tax states. Since Trump enacted this, calling for a repeal (which almost every member of high tax states has been calling for since inception) seemed a little silly.
I am not sure if he understood what he was pitching, but he is not far off. First, the intended result was that without the deduction of state and local taxes, the high tax states would be forced by their residents to cut taxes. Not one has. No tax cuts in Illinois, New York, New Jersey, or California. Residents continue to flee to lower tax states. That aspect has been a failure.
The other failure of this program is an insane thing happened. After a couple attempts, the IRS allowed a workaround program to allow the deduction of taxes as long as your earning came from a passthrough entity like an S Corporation, LLC, or partnership. This created a large and complicated bureaucracy adjunct to the tax system to achieve this workaround. Worse, it created a huge inequity in the tax code. If you are self-employed or a salaried employee at a company, you cannot avail yourself of this workaround. Your neighbor who works for a partnership could be earning a similar income yet paying significantly less in federal taxes.
The program needs to either be cleaned up or junked.
Ms. Harris’s proposals are more focused on collecting taxes and then handing it out to targeted groups to accomplish her policy goals. For example, she is proposing giving people $25,000 to buy a home. Most everyone rightly sees that as a means to increase the cost of buying a home as sellers will adjust their pricing based on the federal largesse.
Harris is the unusual candidate that is actually proposing increased taxes. She says she is only going to do that on people who earn more than $400,000. With that proposal she is already raising taxes. Because of inflation during the Harris/Biden era, that $400,000 limit made by Biden and copied by Harris has become close to $500,000 yet she has not raised her targeted amount.
She also wants to let the Trump tax cuts expire at the end of her first year in office. Trump wants to renew those. Democrats suggest that only corporations and billionaires benefited from the tax rate adjustments in 2017. That is false. Proportionately people in the middle class benefited more.
Here is a perfect example. When large corporations received a tax rate adjustment, a new section of the tax code was put in to let smaller business owners eliminate part of their income to equalize the tax benefit. If Ms. Harris does not approve the tax program extension, 25 million small businesses will have their taxes raised. That proposal is nowhere in her plans. So much for not increasing the taxes on the middle class.
Harris is proposing a wealth tax which I consider clearly unconstitutional. This 25% tax is aimed at the increased value of assets that people hold — but have not sold — to generate taxation. She states it is aimed solely at people of great wealth, but the American people have heard this story before as something like this soon ends up being applied across all economic strata.
Here is something that speaks volumes about the two candidates. Ms. Harris was endorsed by the IRS agents’ union. Do you really want to be on the same side politically as the union of IRS agents? I do not.
While some of Trump’s proposals are a little over the top and need fine tuning, the main thing is Trump is for lower taxes with people keeping their hard-earned money, and Ms. Harris is for higher taxes and the government deciding who gets the money.
You decide.
