Dominating the news is the Republican “plan” for tax “reform.” If you are not closely following the proposals, you should be. You need to keep in mind that you are both a business and an employee, so whatever changes are made to tax laws will affect you.
With nothing finalized, it is hard to determine exactly what the proposed changes will do to my tax bill, but based on what has been leaked so far, I will be paying more, not less, federal tax. More worrisome, however, is what effect “reform” will have on my state and local taxes.
In speaking with one colleague, he told me he didn’t care if they eliminated or capped the mortgage interest deduction because he rents. On the surface, that sounds right, but it isn’t — he forgets that his landlord likely makes use of the mortgage interest deduction and if losing it causes the landlord’s taxes to rise, the loser will be him, not the landlord, because his rent will rise to cover the additional tax burden. He also was dismissive of the limits proposed for deduction of real estate taxes, yet the same scenario plays out for real estate taxes as for mortgage interest deduction.
Do you work for nonprofits? Nonprofits are concerned that charitable contributions will decrease under the proposed “reform.” If that occurs, might that affect your business? Early reviews indicate that most middle class taxpayers will see little to no lowering of taxes actually paid and that many will see an increase.
If you are a corporation that generates more than $5 to $10 million in annual revenue (as a professional editor, wouldn’t you like to see such a balance in your bank account?), the proposed reforms will be beneficial (the U.S. Chamber of Commerce can’t praise the “reforms” enough). In contrast, smaller businesses are expected to either remain the same or do worse (which is why the National Association of Small Businesses is opposed to the proposed “reforms”).
Similarly, if your personal income (after business expenses) places you in the top 1% (possibly even the top 5%), you tax bill will be lowered by an average of $133,000. Alas, those whose after-business-deduction income brings them down to a more earth-like number of around $60,000 (or less), will either see a very little relief (averaging less than $300) if they have the right additional personal expenses or no relief (because they do not have the right additional expenses) or even a small increase in taxes.
Are you deducting medical expenses or student loan expenses? Those will be passé under the “reform.” And so it goes. Of course, nothing is yet settled but things could be settled without your input if you aren’t paying attention. (It is worth noting that taxpayers residing in high tax states like California, New Jersey, and New York, are likely to see increases in their tax bill, but residents of no-income-tax states like Nevada and New Hampshire have no reason to gloat. Apparently many in those states will see a rise — it will be indirect, e.g., increased rent or local tax, rather than direct.)
We also need to think about the “drip” effect of the proposed “reforms.” Republicans are betting that by lowering corporate taxes, corporations will move more of their money onshore and take their tax savings and hire more American workers and/or give their current non–senior-level American workers pay raises averaging more than $4,000 a year, rather than hold on to the money or pass it out to senior-level management and shareholders. Unfortunately, there is no precedent to support this expectation of pay raises for lower-level employees. (It also ignores a fundamental of business: it is cheaper to give a bonus than a pay raise. A bonus is a one-shot deal that may never happen again and leaves the worker’s pay amount the same, whereas a pay raise is forever.)
What I find most interesting is that no one is talking about Sam Brownback’s Kansas, the first true real-life experiment in trickle-down economics. Brownback and the Republican legislature were firm believers in trickle-down economics: companies will flock to Kansas and create jobs, wealthy folk will move to Kansas and spend their money in Kansas, state coffers will overflow. Unfortunately for Kansans, reality is not the same as fantasy. All of trickle-down’s promises — more jobs and revenues, higher incomes for everyone, more money for education, and so on — failed to materialize, so much so that Kansas was on the cusp of bankruptcy and the Republican legislature had to raise taxes.
The point is that when discussing taxes, there is much more that needs examination than the surface promises. Additionally, that examination needs to be made from both the business side and the personal side. We cannot take a politician’s word that benefits will accrue to us. We need to dissect each proposal and determine what effect it will have on us. We also need to think about what effect each proposal might have on our clients. For example, if you edit for the real estate industry, what is the likelihood that a change in the mortgage interest deduction will impact your clients and cause them to consider not using your services as a way to save money? Or that it will cause clients to lower what they are willing to pay for your services?
Once you have examined the tax proposals, you need to participate in the process. As independent contractors, we need to be proactive, not reactive. We need to let our legislators know how we will be affected — whether positively or negatively — and what we want our legislators to do. But we need to do this from a position of knowledge, not from sound bites.
I know what I will be telling my legislators. Do you know what you will be telling your legislators?
Richard Adin, An American Editor
An American Editor 