The Republican Party, with a majority in both the Senate and the House, and inspired by President Donald Trump, is in the midst of trying to jam through a horrific tax plan that will benefit the wealthy at the expense of the middle class and poor, many of which are New Yorkers.
The stated reason for this wayward tax plan is, “a rising tide floats all boats,” otherwise known as trickle down economics.
Trickle down economics was the moniker given to former President Ronald Reagan’s tax policy in the 1980’s, and history proves it doesn’t work.
New York State already sends $48 billion more to Washington than it gets back in Federal Programs, which is the largest benefits deficit of any state in the nation.
Both the Senate and House proposals want to eliminate or severely diminish the deductibility of state, local and real estate taxes, plus cut the cap on home loan mortgage interest deductions to $500,000.
All this just to pay for tax breaks for the wealthy, with huge corporate tax breaks as the centerpiece of both proposals. It is estimated the final Republican tax plan will cost Long Islanders an additional $2.5 billion annually.
The purpose of this article is twofold: to highlight the negative impacts of the Republican tax plan; and, to call attention to several existing tax laws, that already benefit the wealthy.
Adjusting these five tax laws alone would go a long way to balancing the budget and creating a more equitable tax code for the middle class and those in need. The five laws I’m referring to are:
Carried Interest – By definition, it’s the share of profits the general partners of private equity and hedge funds earn as compensation, regardless of whether or not they contributed any initial funds.
If you are a successful hedge fund manager, you love that carried interest’s highest tax bracket is at the long-term capital gains rate (20 percent), as opposed to being at the ordinary income rate (39.6 percent).
“The Nation” reported April 12 of this year, that this tax break is an annual $18 billion giveaway to the wealthy, with New York State coffers losing $3.7 billion.
1031 Exchange – This is the section of I.R.S. tax code that enables investors to defer capital gains taxes on “any exchange of like-kind properties for business or investment purposes.”
Essentially, as long as you purchase an equal or more expensive property after selling profitable real estate, you defer taxes. The Joint Committee on Taxation estimates this law created a tax savings for well to do real estate owners of over $42 billion, from 2012-2016.
Step up in Basis – This tax loophole allows you to inherit stocks, real estate or closely held businesses at a “stepped up” fair market value, as opposed to what was originally paid for the asset.
However, in a 1031 Exchange, there is a step up in basis on the death of an owner even if taxes were deferred for decades. Not a bad loophole for those lucky enough to have been born to wealthy parents, who did nothing to earn an appreciated investment.
Raising the Estate Tax – The 2017 Federal Estate Tax doesn’t kick in until an individual’s estate is worth $5.49 million. The Republicans are looking to double it to $11 million, which will then only affect about 2200 individuals yearly, providing an enormous and unnecessary tax break for the wealthy.
New York State will likely follow suit in raising its estate tax to match the new proposed federal rate, or risk its wealthiest residents moving out of state in the twilight of their lives. With New York’s looming $4 billion budget deficit next year, this tax cut for the wealthy could create difficulty in balancing the 2018 state budget.
In 2014 the federal estate tax raised $19.3 billion from roughly 5000 tax returns. New York State collected a little over $1.5 billion in estate taxes in 2016. Raising the estate tax is a ridiculous giveaway to the heirs of so few.
Section 1256 Contracts – This is a tax break for futures and commodities traders. It means 60 percent of profits, including day trading speculation, are taxed at the lower long-term capital gains rate, while the remaining 40 percent are taxed at the ordinary tax rate.
For a successful day trader, this saves roughly $16,000 in federal taxes for every $100,000 in trading profits. There is no good reason for this tax break to exist.
The proposed Republican tax plan could easily find much needed revenue among the aforementioned tax giveaways for the wealthy.
However, balancing the budget, once a Republican mantra, is now a thing of the past. The new tax plan is projected to add $1.7 trillion over the next decade to the already over $20 trillion national debt.
To pay for all the tax breaks to the wealthy and corporations, the Republicans also want to lop $1.5 trillion from Medicare and Medicaid over the next 10 years. If this happens, quite simply, many Americans will die from substandard health care.
And, heaven help us if interest rates spike. The average maturity of outstanding government debt is 70 months.
A 1 percent interest rate hike over that time means over $200 billion, or about 5 percent of the Federal budget, would go to additional interest payments on the national debt. This is a looming disaster nobody is willing to address.
Republicans want to mortgage America’s future so the rich can get richer at the expense of the middle class and poor, and there is no doubt this will directly impact New Yorkers. History will show the Republican tax plan, currently proposed by the Senate and passed by the House, for what it truly is, a catastrophe.