As a tax professional, the first Republican presidential debate made two things abundantly clear when it comes to tax reform and the related business incentives. The first is that there is no way we will get major tax reform (i.e., simplification) unless one party controls the presidency and at least one (if not both) houses of Congress. The second is that there is such a divide between the Democrats and the Republicans that any tax reform will require a tremendous amount of willpower from the party enacting the change and cooperation between the Administration and Congress.
While I’m not a big fan of any of the candidates in particular, I will say that Donald Trump, due to his many business and real estate holdings, likely understands how the tax law works. That is, the tax law is simply a series of incentives for business owners and professional investors. Over the past 50 years, the tax law has been used repeatedly to encourage a variety of activities by the taxpaying American public.
The tax code includes incentives to own your own home (home mortgage interest and tax deduction), incentives to donate to charities, incentives to send your children to college, incentives to save for retirement and incentives to hold investments for more than a year. These particular incentives apply primarily to the middle class. There are many other incentives that only apply to business owners and serious investors.
Let’s take Dr. Ben Carson’s recommendation of a 10% flat tax. He says he will eliminate all of the deductions. So does he mean to say that if a business has $1,000,000 of gross income and $3,000,000 of expenses, generating a $2,000,000 loss that he will tax 10% of the $1,000,000?
And when Senator Rubio suggests that he will lower the tax rate on small businesses to 25%, what is he really talking about? My understanding is that he wants to force all small business owners into taxable “C” corporations. That would be a major increase to the small business owner, since no small business owner with any sense operates as a taxable “C” corporation. Instead, they operate as an “S” corporation or partnership or other nontaxable, flow-through entity. Under Senator Rubio’s proposal, small businesses would be subject to a double taxation that does not currently exist.
Not only that, my experience with my own clients is that there are few successful business owners who get decent tax advice that pay more than 25% currently. There are literally thousands of ways for a business owner to reduce their taxes below the 25% tax rate. The same holds true for professional investors who invest in real estate, commodities and private equities.
In order for major tax reform to happen, the next president, with the support of Congress, would have to make some very tough choices. He or she would have to ignore the big lobbies and recognize the upheaval that major tax reform would produce in the economy. For example, imagine the impact of taking away the special tax benefits to the oil and gas industry. At prices in the $40-$60/barrel range, very few people would take the chance of investing in oil and gas without the big up-front tax deduction that currently exists. What would happen to the real estate market if major changes were made to the depreciation rates or to the deduction rules? Don’t forget the Savings and Loan crisis of the late ‘80’s and early ‘90’s that was largely the result of the passive loss rules enacted by President Reagan.
I’m not suggesting in any way that tax reform is not needed. I just wonder whether any of the presidential candidates have the willpower and ability to work with Congress to get it done. It certainly won’t happen as long as the American public is in the dark about how the tax law really works.
Tom Wheelwright, Author (“Tax-Free Wealth“), CPA and CEO of ProVision Wealth (Tempe, Arizona), is a leading tax and wealth expert, speaker, and a Rich Dad Advisor/Speaker for Robert Kiyosaki, who wrote Rich Dad Poor Dad. He is best known for making taxes fun, easy and understandable, and specializes in helping entrepreneurs and investors build wealth through practical and strategic ways that permanently reduce taxes. His work has been featured in Accounting Today, Investors Business Daily, Deseret News National, and as a guest on the ABC Radio News, AM870 The Answer, Real Estate Guys Radio Show and Money Radio 1510 Business for Breakfast.