Why the Latest Tax Reform Plan Is "Fake News"

The truth is, the GOP's sweeping plan to overhaul the U.S. tax code - the plan to create jobs and lighten the tax burden on America's wage-earning workers - is insulting.

That's because the justification for the cuts is based on hoary, old, fake tax policy narratives like: "Higher taxes on the rich hurt the economy," and "tax cuts for the rich trickle down," or "U.S. corporate taxes are the highest in the world," and "lowering taxes will bring outsourced jobs back home."

Besides being fake, nothing in any of these narratives addresses the new American economy, where more income is earned by companies and wealthy individuals through capital than through labor.

When you understand that, you'll see why income and wealth gaps are increasing all over the United States.

What's more, you'll see that the real, workable solution is in fact a few simple tax and tax-cutting ideas that actually spread the wealth.

Here's what I mean...

It's All About Where Your Bread Is Buttered

A study by the non-partisan Tax Policy Center in 2012 found that the higher up you go on the income ladder, the more one's share of income comes from capital gains.

Tax reformFor about 99% of taxpayers making less than $500,000, salaries and wages accounted for at least 75% of adjusted gross income.

For taxpayers making $500,000 to $1 million, salaries and wages made up about half of earnings.

But for individuals making $10 million or more, salaries and wages account for about 15% of income, with capital gains making up a whopping half of their earnings.

While salaries and wages are taxed as ordinary income, capital gains and long-term capital gains are taxed between 0% and 20% - and that's if you take gains.

Remember, there's no capital gains tax due on investments like stock holdings until they're sold for a profit.

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Then there's capital itself. Corporations, pass-through entities like partnerships and LLCs, and individuals who have capital, or anyone who can borrow capital and write off the cost of that capital, can employ that capital in innumerable ways. They'll not only not pay tax on it, but they can shelter income derived from it for years, if not forever.

Now, don't misunderstand me: There's absolutely nothing wrong or illegal about taking advantage of tax code rules that favor capital accumulation, capital investment, and capital gains.

The problem for average wage earners is the percentage of tax they pay (and what it costs to live) leaves them no capital with which to capitalize income shelters or make significant enough capital investments that generate wealth they don't have to pay taxes on.

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It Makes Sense to Change What We Tax

Median household income in the United States is $59,361. According to the Tax Policy Center, the bottom two-fifths of earners made $47,300 or less in 2014, the middle two-fifths made between $47,300 and $134,300, and the top fifth made more than $134,000.

So, you can see, even at the high end of income, a family of four - after healthcare, housing, and everyday living expenses - has nothing left.

With the shift in the American economy to where more income is generated through capital than labor, it makes sense and is fairer to tax capital more and labor less.

A lot less, in fact.

This is the year 2017: Constant technological innovations yield better and cheaper equipment and software that replaces workers and redistributes income from labor to capital.

Additionally, technology augments productivity more for highly skilled workers than for low-skilled workers.

On top of that, because of globalization, labor-intensive businesses once domiciled in the United States have been outsourced to countries with cheap labor while capital-intensive companies remain here.

The result is an increase in capital's share of income and a decrease in labor's share.

Here's where the insulting fake news comes in: The proposed tax cuts and reforms are being sold as a benefit and relief to the middle class, when they're really designed to benefit capital.

Meanwhile, wage-earners are supposed to benefit when:

  1. Lower taxes on the rich trickle down when they make more capital investments.
  2. Lower corporate rates will allow companies to pay more dividends, conduct more share buybacks, and invest in more productive capital-intensive technologies.
  3. A one-time tax holiday on repatriated cash will fund dividends and share buybacks and encourage companies to hoard more cash overseas until the next tax holiday.
  4. Pass-through entities, which capital-rich individuals and companies set up, are taxed at a lower rate so they can set up more entities and invest in more technologies that generate more returns on capital.

There's no way that could work to wage-earners' benefit; it's like prescribing aspirin for an axe in the head.

The point is, the tax cuts are mostly about cutting taxes on capital that begets more capital investment.

I guess the break for wage-earners is they won't have to go to H&R Block to get their taxes done, because they'll be able to do them themselves on a post card.

Some benefit.

Wealthy investors get to use the postcard, too.

Here's what U.S. House Speaker Paul Ryan and other Republicans have been promoting as a draft of the postcard everyone from wage-earners to wealthy individuals will benefit by:

fake news
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Even the postcard proves how anyone who earns their money from capital investments benefits more.

You can see it plainly...

If you're a "wage and compensation income" earner (you know, a worker) raking in $100,000 or $500,000 on line 1, you simply don't benefit as much from the postcard filing as someone whose investment income of $100,000 or $500,000 is filed on line 2, since he starts by only entering half that income.

How's that fair?

It simply isn't.

What would be fair is a progressive, flat-tax structure for wage-earners, capital investments, corporations, and pass-throughs, and the elimination of almost all "deductions."

Taxing capital more makes sense since most of America's income is from capital. It's that simple. And it's fair.

Look, the last truly sweeping tax reforms went down more than 30 years ago - an eternity by America's fast-paced standards.

Right now, we've got a real opportunity to address the new reality of the current American economy and to talk about what constitutes fair taxation and what will really benefit and grow the economy.

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About the Author

Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.

The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.

Shah founded a second hedge fund in 1999, which he ran until 2003.

Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.

Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.

Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.

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