The Trump Era Tax Plan – Bonus Episode

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[00:03] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. This is a special bonus episode for the Prosperity Podcast. This is an interview that happened with two of our friends over at the Wealth Standard Radio Podcast, host Patrick Donahoe’s talking with Tom Wheelwright about Trump’s new tax plan. So this is breaking and we wanted to make sure to get it out to you as soon as possible so that you can hear about the biggest opportunities and the biggest threats that may affect your finances. So let’s jump into this interview and also give a special thanks to Patrick and Tom for letting us share this with you. Okay, my man, Tom Wheelwright, in the, well, not in person, but close enough

[01:01] virtually in person. But Tom, welcome. Welcome to the show. It’s awesome. Awesome to have you on. It’s been far too long. I look back and it was September 2016 was the last podcast that we did. But this is timely because we have lots of tax stuff that’s in the news and people are probably scratching their head and realize that with the media, we just get the surface issues and don’t get really to the meat of it. So I’m excited to have you on, excited to have a conversation about our friend Mr. Trump’s tax plan. Yeah. Well, thanks for having me back on. I thought maybe you’d forgotten who I was there, Patrick, for a while. I mean, seriously, come on. Impossible. I just think about all the books you’re coming out with and traveling the world.

[01:44] It’s like, man, this guy, I can’t tie him down. Anyway, no, the tax stuff is, I mean, you know, I’m always fascinated by the tax stuff. That’s my life. I am a tax geek, but the tax bills are really interesting. You know, people ask me, as long as over a year and a half ago during the campaign, what would happen with Trump’s tax plan, I said, well, what we’ll get is we’ll get corporate tax reform. I really don’t think we’re going to get much in the way of individual tax reform. And while there’s a lot of changes to the individuals, I do not consider this a tax reform bill because it’s mostly just, you know, little changes here, little changes there. Who gets the benefits? Who doesn’t get the benefits?

[02:26] But as far as a major overhaul to the individual tax law, there’s no major overhaul to the individual tax law. I mean, I think the most major thing that’s happening is, is that a lot of individuals where they used to have to itemize their deductions, which would cause them to have to go to H&R Block or somebody like that for their tax returns, they’re not going to have to do that anymore because they’ve got this $24,000, you know, personal deduction, you know, standard deduction. And they’ve got a limit under the House bill anyway, they’ve got a limit on their home mortgage interest anyway. They don’t get their state taxes anymore. So unless you give a lot of charitable contributions, you’re really not going to

[03:02] have itemize, you know, a Schedule A, itemize deductions. So for people that are in, you know, your typical worker household, you know, two earners and and and nobody has a business and, you know, have investments out of, you know, the stock market and probably your investments in your 401K anyway. I don’t think this bill, I think this bill does simplify things. I think it will simplify things for people, maybe less so the Senate bill. The Senate bill is extraordinarily complex. So the House bill actually has some policy to it. You know, they’re saying, well, look, we’re going to get rid of a lot of these individual tax benefits and give you standard tax deduction instead. We’re going to get rid of a lot of the employer provided benefits.

[03:44] That’s something that you just don’t hear a lot about in the media. But that’s a huge part of the House bill is getting rid of employer provided benefits, for example, you know, entertainment, no longer deductible. So, you know, you go to a ballgame with, you know, a business person or something no longer deductible under the Senate bill. If you provide meals to your employees as a condit, you know, because they they’re working long, long hours, working overtime, whatever, and you’re providing meals there, they’re no longer deductible. Wow. And and there are some so there are some pretty significant fringe benefits that are getting eliminated in this tax law. The biggest, obviously, the biggest reform is with the corporate taxes,

[04:28] which has long been needed. I mean, we’re the we’re the highest taxed corporations in the world. We’re taxed on worldwide income. And it really has caused some challenges with competition and certainly has caused U.S. corporations to to move headquarters overseas, which is the worst part of it. And hold profits and hold money overseas, too, right? Yeah, they don’t really hold money overseas. I mean, this is a big. Yeah, this is this is baloney. OK, most of that money’s come back in some way through a loan or a recapitalization or something else. And the fact that the idea that they’re going to actually bring two million dollars back on shore is baloney. I mean, maybe really mean to try. Yeah, maybe maybe maybe a couple a couple of hundred billion

[05:13] might actually be cash out there. But most of it is just they’re going to go, OK, I’ve got a tax holiday and depending on how good that amnesty amnesty is, you know, in the in the Senate bill, it’s 14 percent. And if you compare 14 to 20, I don’t know that you’re going to get a lot of takers on that. So the 20 you’re referring to is that is what they’re going to put as the corporate tax rate. That’s a corporate tax rate that they’ve got this amnesty for repatriating money from from overseas. But now it’s it’s all the way up to 14 percent of start at 10. Now it’s up to 14. I’m just going. If I could continue to defer that, you know, I’d rather defer it and then eventually pay 20 percent versus 14 percent.

[05:54] If they had a 10 percent, I think they’d get it all back because you’re at 10 percent versus 20. If you cut your tax bill in half and go on, I’m going to I’m going to tax that money, whether I whether I actually have the additional cash, OK, it will look better on my balance sheet because now it’s no longer an expense. It’s actually instead of being a liability, you know, right now it’s probably shown as a liability to some subsidiary overseas or parent company overseas. And so I think at a 10 percent, they would maybe at a 12 percent. I think at a 14 percent, I think they’re shooting themselves in the foot with that one. So, again, the idea behind the corporate tax rate is to normalize it with the tax rates that are that are global.

[06:35] One thing I didn’t I don’t know is, is it going to affect worldwide tax? So if there are businesses that are earning income elsewhere, are they going to still have to pay pay pay tax at that 20 percent rate? Well, if they’re if you’re earning tax in another country, you’re going to pay tax at a higher rate. Right. So you always pay tax at the highest rate wherever you earn the money. But you know, in the US, we’ve always had your tax on all of your income in the US. And so you get a tax credit for taxes paid to another country. Well, even then, you’re only going to get a credit up to the 20 percent. So you’ll still pay the taxes, the higher tax rate, the higher the two tax rates, which now, you know, the higher the two tax rates

[07:11] always used to be the US tax. Now it’s going to be the other country tax. I think the biggest thing that I haven’t seen anybody talk about is that, you know, the whole idea here is to get companies to come here. Right. And I think it will have an impact. I don’t think there’s any question I’ll have a job impact. But the reality is our biggest challenge with competition overseas is not the income tax. The biggest challenge with the competition overseas is the value added tax. So where I mean, if you take the simple example, if you had Boeing that sold a plane to France, they’d pay a 22 percent value added tax on that plane. But if France, you know, if Airbus sells a plane to the US, there’s no value added tax.

[07:56] So that’s a gross tax. So, you know, you’re talking about, you know, a net income tax. So, you know, if your net income’s what, 10 percent? I mean, most most companies net income is at more than 10, 20 percent at the most. OK, let’s say it’s 20 percent, a 35 percent tax rate. Thirty five percent times 20 percent, only seven percent. So that’s equivalent to a seven percent value added tax. Right. Which is really low. Which is really low. I mean, yeah, Canada’s got a low one and Japan’s got a low one. But like Europe, they have like 20, 22 percent value added tax. And so you’re still at a huge disadvantage. And so I don’t I think it’s more of a let’s encourage companies to locate in the US rather than.

[08:42] But even then, if I were if I were located in if I were selling to France, you know, if I were located in France, selling France or European Union, selling European Union, I’d rather not have my value added tax. Right. So if I’m exporting, I don’t have value added tax. But if I’m importing, they do have value added tax. So I still have this I think there’s still that big challenge. I know Paul Ryan, Speaker of the House, Speaker. I think he understands this. I mean, I’ve heard him speak about and write about value added tax. But I guess there’s just not a I mean, I guess there’s no great nobody who’s who’s backing that right now. It literally would be the solution. One of the challenges I have with this new bills, it adds to the deficit.

[09:27] Right. You know, that the deficit is a bigger deal than, you know, people make it out to be. Of course, it hasn’t had a huge impact for the fluctuations in the market. But that brings up a good point, Tom. And I want to kind of go to, you know, the whole narrative of income tax and in general. But let’s let’s hit on this point, because if you if you look at, I would say what is said in the media, which is this is kind of the trickle down type of economics, where if you give tax breaks to business owners and entrepreneurs and investors, that they’re going to reinvest, which will grow the economy and eventually create, you know, more income than it would have just going to the government off the top.

[10:18] So what’s your what’s your take on that? That’s kind of the Reaganomics, you know, narrative. What’s the right objective there? Well, so I think the objective with the corporate tax reform is twofold. I think one is to bring companies and actually encourage people to headquarter their companies in the US. And I think it will do that, actually. I do think because we’re the largest economy, even though we’re not the most populous economy, we’re still the biggest economy. We’re certainly the biggest consumers of worldwide resources. Right. And so I think it will encourage companies to locate here. I think it will. I think this bill does encourage people. I mean, we’ve got 100 percent write off of machinery and equipment.

[10:59] You know, we’ve got much better depreciation tax rates on on on the commercial real estate. I mean, the Senate bill goes from 39 years to 25 years on commercial real estate. So there’s some really big real estate tax benefits in these bills. So I do think that the whole emphasis of the bill of this legislation, it’s it’s, you know, people get caught up with, oh, well, I’m losing my state tax deduction. Well, that’s not the point. I get that you’re losing that, but you’re also getting lower tax rates and you’re also right. And you’re getting you’re getting some simplicity from an individual standpoint. The point of the whole bill is it’s it’s really corporate tax reform. And it’s really the idea that if we lower our taxes

[11:42] and and we lower the taxes on business, it’s particularly big business. I mean, they’re actually they’re not lowering taxes to any significant extent extent on small business. Small, small business is really not getting a big tax rate, which I actually, by the way, have been saying for a year and a half that even though Rubio in his campaign, he wanted a 25 percent tax rate for small businesses. And we hear people talking about a 25 percent tax rate for small businesses. There is not a 25 percent tax rate for small businesses. What there is is there’s a 32 percent tax rate for small businesses. So instead of having a high the high tax rate of 35 percent, this business, the small business tax rate is now 32 percent,

[12:24] which if you compare it, what really happened and this is where I’ve never heard anybody else talking about this. If you look at the core, if you were a corporation and you’re paying 20 percent, right? And then you’re sending your dividends out. And and and the people who get the dividends are paying 15 percent. Your your combined tax rate is 32 percent. OK. But now what they’ve done is they’ve said, OK, flow through entities. You will pay the same tax rate as taxed entities like corporations. So what they’ve really done is put make it made a parity between the big core, big companies and the small companies, because the small companies always had a huge tax break compared to the big companies.

[13:02] I mean, you know, the big companies were paying like almost 50 percent in their tax rate when you consider the dividends tax and the and the and the flow through entities were paying, you know, at, you know, 35 percent. So there was a big disparity. Now there’s no disparity. OK. But that’s all that happened with the flow throughs. The flow throughs are not getting much of a tax break because they already had the tax break. And Tom, that might be a misconception. So maybe maybe just just clarify that one more time. Because right now, some believe that flow through entities like, you know, an S Corp or an LLC, they get a 25 percent. You know, that amount is at 25 percent. That is not correct. Yeah. So how so why is that?

[13:41] Why isn’t that not well, because because under the House bill, under the bill of the House passed the flow through entity, 30 percent of their income is taxed at 25 percent. Yep. OK. So if you look at that, 30 percent of 25 percent is what, seven and a half percent. Yeah. OK. Well, OK. So take the seven and a half percent off of your top off of your top rate. Thirty nine point six, which is 32. So, I mean, you end up with 32. Right. So you’re really not reducing your your flow through tax rate that much. And you’re you’re really not. I mean, it is. It’s very interesting because that’s what’s happened. I mean, right now, typical business owner, the successful business owner is at a 39.6 percent tax rate. Right.

[14:31] And now they’re going to they’re going to go down to a 32 percent tax rate. That’s effectively what’s going to happen. Except for some companies that will not get any tax benefit like mine. OK. Under the House plan. OK. Under the Senate, that’s the professional services. Right. That kind of services. That’s right. So professional services, doctors, lawyers, accountants, architects, et cetera. Don’t get any tax break at all. OK. And well, it’s interesting. So then under the Senate bill, the Senate bill is really weird. The Senate bill doesn’t give you a lower tax bracket. It actually gives you a tax deduction. OK. So instead of being taxed on 100 percent of your income, you’ll now be taxed on.

[15:13] Well, they say it’s a 17.4 percent deduction, but it’s not because it’s limited to 50 percent of the salary you pay yourself. OK. OK. So you have to choose. Am I going to take Social Security tax, which if I pay a salary, I’ve got to pay Social Security tax. Or am I going to take the 17.4 percent deduction on half of that? OK. So it really amounts to about a six percent reduction in tax rate. So it’s pretty close to the House when it comes down to it. The Senate bill actually does cover more small businesses and actually a small CPA firm actually gets the tax benefit. OK. But but only if you’re really small. I mean, you got to be like $500,000 or less on your tax return, which I consider that be a small, you know, a small professional services company.

[16:07] So with with this, I mean, your your your first book, you know, Tax Free, Tax Free Wealth, you you you make the case where the tax code is essentially a map to not pay taxes. So you look at then kind of the secondary part of that, which is the you know, the government is essentially creating that map to to funnel money into different into different areas, you know, based on whatever their objective is. So with with that in mind, with this plan, whether it’s the House or the Senate plan, like what are they what are they trying to accomplish? Because it’s like they have the corporate the corporate benefit. But then they’re doing things like they’re, you know, limiting interest deductions, you know, on on primary residence mortgage.

[16:50] They’re also, you know, doing away with the state, you know, income tax deduction. They, you know, have the phase out of the estate tax. I mean, so what do you like, as you’ve been thinking through it, using that lens of narrative, what are they trying to accomplish? Is it just the corporate, you know, just the corporation side of things and stimulating the economy through that or or is it something else? Well, if you if you look at it, what they’re doing, two things. I actually call this the Wall Street Bill, because this is a bill that benefits Wall Street more than anybody else. Think about this. Let’s say that you’ve got a company that makes a million dollars a year. And now you’ve lowered their tax rate from 35 percent to 20 percent,

[17:36] which now what you’ve done is you’ve given them one hundred and fifty thousand dollars more. OK, so their profits now are one hundred fifty thousand dollars more than they were. Right. Well, what’s that going to do to the stock price? By definition, stock price is based on P.E. ratio. Right. So by definition, it pushes your stock price up, which affects everybody with a 401K. So it really affects Wall Street more than anybody else. This bill is a Wall Street bill. It is not a Main Street bill. If anybody thinks the Main Street bill, they’re they’re they’re crazy. This is not a Main Street bill. This is a Wall Street bill. And so it affects the big companies get the most benefit. OK. You know, there are a couple of knocks on the big companies,

[18:20] like not being able to deduct the meals that you provide to your families. I mean, I think that is I mean, to your to your employees that what that is, is that’s a slam against Silicon Valley, because they all do that. And they they have huge kitchens and chefs and everything. And and and basically they’ve been they’ve they’ve been against Trump and the Republicans. And so Trump’s just saying, you know, let’s, you know, just stick it to them. I mean, that that that’s what that is. That’s clearly interesting. That’s that’s that’s going that’s a slam to Silicon Valley. Of course, there’s also a slam to anybody who who lived on the coast who voted against Trump. Right. So New York, California, New Jersey, the other ones who really

[19:03] voted heavily against Trump. And guess what? They’re the ones who have high state taxes. And guess what? State taxes are deductible. So there’s I actually read an interesting article suggesting that this was weaponizing the tax law. But I’m going it’s always been a weapon. So that is that article. Oh, yeah. Well, I didn’t write it. I mean, I read this a couple of weeks ago. But what was really happening is in the tax weaponized and tax. But this tax law has been a weapon for many, many, many years. To go to your point is that what’s really going on here is it’s just pushing you more to, you know, the government saying we want more business and investment, particularly investment in any capital equipment and in real estate.

[19:44] And so more than ever, there’s really an more and more incentive to be in business and be in real estate. I mean, really, those are the two that got that are getting the big impacts. By the way, you your your lobby has done very well. Once again, life insurance pretty much came out unscathed. I’ve always felt like the life insurance lobby was one of the best lobbies ever. Hard. They fall hard because they were trying to get rid of some of the yeah, some of the tax benefits. Yeah. Yeah. And now there’s an interesting one that actually and property insurance companies have a special tax benefit under the under the Senate bill. And I can’t remember exactly what it is, but they only those companies

[20:30] only casual property insurance companies. And so obviously, there’s a senator in a state that has a lot of casual property insurance companies that they are, you know, they’re they’re they’re pushing that right. Well, let’s maybe let’s let’s go to that. Let’s go to this point. I think this would be this would be really, really good because we were having a conversation up up to, you know, the time we started recording where, you know, there these bills are huge, like 400 pages. I can’t remember how big the the Senate one was. But it but you you went through it. And obviously, it has details of the actual changes. But then you were able to filter and say, well, this senator got that or this rep got that.

[21:12] So let’s talk about through, you know, getting, you know, really getting the bill passed and how these things get packed with so many pages, because one of the point is, well, we’re simplifying. We’re simplifying one page. But yet, you know, you need 500 pages to simplify it to one page. So, you know, what’s your what’s your take on that? Well, it’s interesting. The Senate, you know, the Senate has a really tough time because the Democrats have decided it doesn’t matter what the Republicans propose, we’re going to vote against it. Doesn’t matter how good it is for you to vote against it. You know, the Senate, the Senate Republicans actually came up with a really good bill this last summer to improve Obamacare,

[21:55] not replace it, but improve it. It was a terrific bill. I read through it. I said, this is exactly the bill I would write. And it couldn’t even get a vote. I mean, they went to vote. You know, they voted on a couple of them. They didn’t vote on this one, which was a really good bill. And the Democrats, probably a lot of the Democrats liked that bill, but they can’t vote for it because the Democrats’ sole goal is to get control. That’s their only goal. They don’t care about the public. Now, frankly, the Republicans don’t care either. OK, everybody’s goal here in Congress right now is let’s be in control and let’s get elected. Not that we’re going to get anything done, but let’s get control and let’s get elected.

[22:33] And then the Republicans are just a mess because they’ve got three or four senators that will not fall in line. I mean, they just they would rather have nothing happen than have something less than exactly what they want happen. Right. And we all know who those senators are. And because they they voted against the Obamacare bills and they were very consistent. They’re the ones that are holding out on the on the tax bill. And a couple of them aren’t even running for running again. You know, and it’s like, can’t you guys get your act together? But here’s what I really notice. I’m going through the law and there’s things like there’s a provision that says, so get this. So apparently there’s a tax.

[23:14] Now, I’m not familiar with this because I don’t deal with this a lot. But there’s a there’s a an excise tax. There’s a tax if you bring wine in that has greater than a 14 percent alcohol content, you get a certain a higher tax. And if it’s 14 percent or under alcohol content, there’s a provision in this bill that moves that that percentage from 14 to 16 percent. So all I’ve got to believe is there’s somebody out there, some senator that goes that they’ve got a big contributor that has that 15 percent alcohol content in their wine, in their wine or whatever their alcohol is that they’re calling wine. Maybe it’s port, you know, sherry, something like that, a high high alcohol content wine. And they’re going, OK, I want that in the bill.

[24:01] And so they’re putting it in the bill. There’s there’s there’s another one with regard to beer. OK, there’s a special provision for beer. There’s one I can’t I can’t remember. It’s replanting of citrus. OK, it’s replanting of citrus. There’s a special bill for replanting citrus and they get some special tax break. I mean, that it’s you just I’m just reading through this. I’m going, OK, this is not like you said, it’s not simplification. This is OK. I’m going to get this senator in line with this provision, the senator in line with his provisions, the center in line with his provision. And really what happened was your senator, Orrin Hatch, went around and said, OK, what do you all want? And let’s just give everybody something here

[24:42] that the House bill is not like that. House bill is actually fairly clean from a policy standpoint. There’s not a lot of what I would call pork in the House bill, but there’s a ton of pork in the Senate bill. So, you know, I heard I heard just just this morning that they’re they’re not actually going to vote on that. They’re not even take up the Senate bill until after Thanksgiving. And and the reason is they’ve got they got, you know, they got to get 50 votes, right? They got to get 50. You know, Pence will will break a 50-50 tie, but they’ve got to get 50. They don’t have John McCain on board. My my senator, they don’t have him on board. You know, they I mean, they’re they’re just not quite there yet.

[25:28] And it’s like, OK, what do we have to give people? And then also understand that once the Senate does come up with whatever they pass, now the House and the Senate have to get together and they have to come up with something that everybody likes. And, you know, that the Senate has kept the medical deduction. They’ve kept the state income tax deduction. You know, they’ve kept a lot of those itemized deductions that the House got rid of. They kept the home mortgage interest deduction. They kept it at one million instead of bringing it down to 500000, like the House did. So there’s a lot of there’s still a lot of horse trading that has to go on here. What’s probably going on right now? Yeah, it’s going on right this minute.

[26:07] We know what’s going on in the Senate. Then it has to go on between the Senate and the House. So whether we act, what we do know is there are certain things that we think that I believe will pass. I mean, I do think we’ll get a lower corporate tax rate. OK, it’s really interesting. It’ll be really interesting to see what happens with the small businesses. Now, here’s all it means is to go to your point about, you know, the tax law being a road map. It just tells you that you need to change your course. That’s all you know. You just got a course adjustment going on here. So, for example, a lot of companies that are forming and even companies that are already formed have got to start thinking about,

[26:42] do I want to be a C corporation instead of an S corporation? I want to be a C corporation instead of a partnership because, you know, in my business, for example, under the Senate bill, a CPA firm gets a flat 20 percent rate. OK, in the House bill, it’s 25 percent. So I’m going, maybe, you know, maybe I want to be a C corporation, you know, which is which is what everybody was. Frankly, prior to 1986, everybody is a C corporation anyway. Right. That’s the way it used to be. Well, that’s actually 82 that changed that. But prior to 82, prior to Ronald Reagan, all professional service companies were C corporations because there were tax benefits. If you were a C corporation, then they changed it.

[27:25] They made it, pushed it, pushed it towards flow through entities. Now we’re pushing them back. I mean, remember, there’s a tax benefit in there. If you’re a small business and small is not really small. OK, under the new bill, small is under 25 million. So it’s not what we typically think of as a small business. But if you start a business and and you start as a C corporation and you sell that business after five years, no tax. There’s no tax on the gain on sale of that company. Really? If if I were starting a new business, I would be thinking really heavily because we used to not do that, because who knows if you’re going to sell it, you’ve got losses. You want those to flow through to offset your personal income tax.

[28:07] But now, now maybe now you think very differently. Now that this tax bill will force people to think very differently about what their incentives are and how they’re going to form. The challenge I have is that. I have found very few tax advisors who have even read the bill. And I’m just going, how are you ever going to serve your clients if you haven’t read this bill, because there’s so many so many changes in it, so many things that complete that that really adjust your strategy. Now, from our standpoint, oh, let me give you one more. This is this affects you, pal. OK, you know, you’re familiar with the kiddy tax, right with children. Yeah, you’re you’re you’re familiar with what we have now.

[28:48] The kiddy tax. It’s like 600 bucks a child. You’re above that. If you’re if you’re above a certain amount of investment income, then the kids are taxed at the parents’ rates. Right under the Senate bill. If you’re the kiddy tax applies not at the parents’ rates, but at trust rates. Well, the the the trust rates go up to 30 and eight and a half percent at twelve thousand dollars. So that means that it’s going to make it that much more difficult to save for your kids, for their education, for their their futures, everything like that. So you’re going to have to do some major tax planning. I think what the real answer here is that we’ve always believed, of course, everybody should have a strategy, a plan of action

[29:31] to reduce their taxes. Now everybody’s going to have to revisit that strategy. They’re going to have to think about modifying that strategy. The estate tax, the estate tax change is fascinating to me because all it does, everybody still needs estate planning because you want to take care of your kids. You know, you’ve got a will that tells who the guardians are. You want to make sure you don’t go through probate. All that kind of stuff has to be done anyway. But now is the way you’re thinking of. Maybe I want to retain the assets and maybe I want the kids to have the tax liability or, you know, something different. So it just changes your planning. It’s going to be more important than ever to have a tax advisor

[30:11] really understands the tax law. I mean, there’s no question about that. This is going to make it even more important than it was before because you’re losing all of these obvious tax benefits that everybody knew about. And now you have to go find the tax benefits that nobody knows about. And that’s where I would say in the end, it’s interesting to think through this. It’s interesting to rationalize why are they doing this? Why are they changing this? Why is this happening? But ultimately, unless we have our own lobbyists, we can’t really get much done for us. I mean, the citrus farmer obviously can get stuff done. We can’t, to an extent. So the idea is, you know, really don’t get all bent out of shape

[30:52] because of what is going to happen. We don’t have control over that. You have control over really once it’s in place, the idea is trying to navigate your personal situation so you can have the most efficient tax strategy possible because you’ve stated it a number of times and you can prove it mathematically, which is one of the best return on investments is just paying less tax. And so that’s the thing. It’s like, yeah, you look at simplicity, simplicity, but I would say that’s kind of misleading because it’s simple, but at the same time, if you don’t have your act together, you’re probably paying a lot more taxes than you need to. There’s always been a conflict between simplicity and fairness.

[31:32] So we’re getting simplicity, then the question is, is it fair? Well, you know, if you’re in that 20 to $24,000 range of itemized deductions and you’re married, this is a great bill for you because it does simplify things and it doesn’t increase your tax and it probably decreases your tax. Of course, under the Senate bill, it only decreases it for six years and then all those benefits go away after six years under the Senate bill. The House bill makes them permanent. The Senate bill makes the corporate income tax changes permanent, but not the individual income tax changes. Yep. So both bills, corporate is permanent. Corporate is permanent under both bills, right? Now, the House bill doesn’t start

[32:13] the corporate tax benefit for a year, okay? So they delay it a year. That gives them a hundred billion dollars to play with somewhere. Anyway, it’s, you know what? It’s fascinating, but the reality is, is that, you know, like I’ve always said that the most important person in your financial life other than your spouse is your tax advisor. And that’s gonna be true more now than ever. Unless you’re in that, you know, if you’re in that simple range and what happens is, and you make a good income, you are just slammed with that 35% tax bracket. And if you’re happy with a 35% tax bracket, you know, that’s fine, okay? But if you’re not happy with the 35, 38% tax bracket, then, you know, you probably ought to actually start

[32:57] talking to your tax advisor about what can be done. Now, another thing that people probably don’t realize is that a lot of these provisions are retroactive. They go back to the date of announcement, November 2nd. Some of them go back as far as September. Oh, interesting, I didn’t know that. So the way to look at this is, if it’s a benefit to you, it probably doesn’t start before January of 2018. If it goes against you, it probably started in November of 2017. So they do that so that people can’t play with it, right? Once they know the bill, they can’t then go out and do things to take advantage of the old law, right? That’s why they do it. But the reality is, is that most people don’t realize it’s retroactive.

[33:42] I’ll give you an example of that. Kitty tax, I told you about, that’s effectively a retroactive tax because if you did your planning, then now you’ve done your estate planning and your kids have all of this investment. These investments have ownership in your business, et cetera. That’s investment income to them. And now all of a sudden, instead of being taxed at your rates, they’re being taxed at the trust rates. And it’s just potentially a huge tax increase to you. Now I think that with good planning, it doesn’t have to be a tax increase, but you’re really gonna have to go back in there. You’re really gonna have to dig through it because I’ll tell you, there’s some things in these bills that you just go,

[34:25] what in the world were you thinking about, right? What was going on here? And really what they’re thinking about for the most part is they’re trying to raise revenue to pay the corporate tax bill. That’s exactly what it is. It’s not a function of, we don’t like you, we don’t like you over here. Like I said, there’s policy behind the house bill. They’re pretty much getting rid of a lot of personal deductions and putting a standard deduction instead, right? That’s really what’s going on in the house bill. The Senate bill, it’s just a mishmash and a hodgepodge. And they’re saying, well, we’re gonna give you a benefit because you voted for the bill and we’re not gonna give you a benefit because you didn’t vote for the bill.

[35:04] And that’s pretty much what’s going on. Well, I would say, in the end, it hasn’t, there’s nothing yet. I mean, we’ll see kind of what fleshes out and what the final details are. But that’s really tax strategy is huge, especially for business owners. But I would say this does fit the ultimate Trump narrative, which is jobs, right? Because I think corporations, if there’s more money, the idea is that they’ll be here and then they’ll create jobs, right? And then that type of stimulus is essentially good because you effectively increase tax revenues, right? Right, so what’s interesting about this bill is that we haven’t heard a lot of Trump talking about the bill and you haven’t seen him. You feel like this is a Republican bill,

[35:55] it’s a Senate bill, it’s a House bill, it’s not a, or it’s a Paul Ryan bill, it’s not a Trump bill. But when you get into the details, this has Trump all over it. I mean, it’s got, we’re punishing the coasts, we’re gonna benefit the blue collar, where the white working class is absolutely getting the most benefit out of this because they’re gonna get jobs out of it. That’s the jobs. If you’re a professional, if you’re a professional, you are not getting the benefit. If you are a working class, you are getting the benefit. So Trump’s got a lot of his fingerprints on this. There’s no question. This is, I don’t think anybody should make mistakes thinking this is not a Trump bill. This is an absolute Donald Trump bill.

[36:38] It’s the corporate tax reduction, which is what he’s wanted since day one. And it’s, and again, it’s not a Main Street bill. I mean, there are things you can do. Now the nice thing is, the tax law is ultimately fair in that two people or two businesses that have the same situation are gonna pay the same amount of tax. So if they choose, so now you have a choice. You know, before it was really easy. Am I gonna be a C corporation? Well, I’m never gonna do that because I’m gonna pay higher taxes. Otherwise I’ve got such higher taxes with the double tax. Now you have to really think long and hard of, maybe I wanna be a C corporation. They’ve actually put some nice provisions in the bill for transition

[37:21] to get you out of being an S corporation into a C corporation. So there’s actually a good transition there for professionals. I think professionals are gonna have really, I mean, if a professional company isn’t a C corporation, I think they’re gonna have to justify that to their partners as to why they’re not a C corporation because I, unless they’re taking all the money out, all the time, I think that I’m just not sure that they’re not way better off being a C corporation. So it’s gonna create some really interesting dialogue. It should, I mean, that’s really the key here is it should create some dialogue with your CPA. You can make this a tax reduction for yourself. There’s no question. If you’re a small business, big business,

[38:09] doesn’t matter. You can, for a big business, it’s automatically a tax reduction. For a small business, you can make it a tax reduction, but you’re gonna have to work at it. You’re gonna have to make some changes like we like to say, if you wanna change your tax, change your facts. And you’re just gonna have to change some facts here and it may just be that maybe the easy one might just be, I’m gonna be a C corporation. Here’s the nice thing, it’s a flat tax. So no longer do we have to think about, well, we’ve got these tax brackets and we can only have one corporation, we can only have two. We could have 20 corporations all paying a 20% tax rate, which we might want some of our companies to be flow-through

[38:47] and some of them to not be. I mean, it depends on your company if you’re a business owner. I would tell you the other thing that I mentioned briefly, Patrick, is that I am right now itching for real estate under this new tax bill because this new tax bill has such good real estate tax provisions in it that it really, I don’t know how real estate got their lobbying done, but they did a good job. Is it commercial or is it residential or both? So both residential and commercial are going to a 25 year. So they’re gonna be on parity now, commercial and residential. So no longer will it be a detriment to have commercial. Okay, you’re gonna be able to write off a lot of your equipment and improvements, et cetera.

[39:33] So there’s gonna be some huge tax benefits now. One thing in the Senate bill, the Senate bill actually contains a provision that says that you can only deduct up to $500,000 of losses from your businesses against other income. So there’s a loss restriction. And then they also have, and both bills change the net operating loss rules. No more carry backs, only carry forward. And the Senate bill, you can only carry it forward and it can only offset 80% of your income. So what they’ve done is, they’ve eliminated the alternative minimum tax, but they haven’t really. Because the purpose of the alternative minimum tax is to make sure high income people pay some tax. Well, they’re gonna do that. They’re just gonna do it as a separate tax scheme.

[40:18] They’re gonna do it by reducing your net operating losses. They’re gonna do it by reducing the amount of losses from businesses that you can use to offset your other income. So they’re coming up with other ways to do that. Which again, I mean, for me as a tax advisor, I mean, this is a great bill. This is absolutely ensuring that, because we get a new tax bill once every 20, 30 years, big tax bill, this is ensuring that I will be fully employed for the next, for the rest of my life. So I’m pretty excited about this bill. I think it’s great. It’s just not the tax reform that, you know, that’s all, Trump, it is this big tax reform. It’s tax reform for corporations, and it is for them, except that what they do,

[41:04] they just change the tax rate. They change some of the international provisions, right? And there’s some tax reform there, but there’s all the tax deductions, oh, let me give you one more tax benefit that’s going away under the Senate bill. This is horrible. The Senate has decided that research and development expenses will no longer be, you will no longer be able to write them off. You’re gonna have to capitalize them and amortize them over five years, which is horrible, considering that other countries have much better research and development tax benefits than we do to begin with, and now we’re gonna reduce our research and development tax benefits even further. So why would they do that?

[41:44] Is it kind of like a playoff of reducing the corporate tax, and that is- I think it is. I think it’s just a revenue raiser, and I don’t know if it’s a slam against the pharmaceuticals. I don’t know if it’s a slam against Silicon Valley, but I’ll tell you what, it’s really, you know, companies that don’t do R&D, they’re not losing anything, okay? So your typical manufacturing companies, they’re not losing anything, they’re just gaining, okay? But somebody like Tesla, I mean, they’re getting hammered. You know, the pharmaceuticals, which do a lot of R&D, they’re getting hammered. So it’s really, I think this is that and the kiddie tax. Those are the two pieces in the Senate bill that I really, really don’t like.

[42:31] I haven’t been very outspoken on the House bill because I really don’t care. But on the Senate bill, I think that there’s a couple of pieces there that I’m really hoping that they do make some changes to, particularly that research and development. I have a buddy, I told my wife that, I have a buddy who spent his whole career getting that research and development tax credit extended, you know, because it used to fall off every year, right, and he had to extend it. He spent his whole tech, we’re doing that. And apparently he’s retired because somehow we lost this R&D battle, at least in the Senate so far, we’re losing the R&D battle, which I think is a shame because you know what makes America great

[43:11] is research and development. That is what makes us great. We have an edge on developing that intellectual property and we have innovating and solving. So that is interesting. And if I were doing research and development now, I would be going somewhere else. I really would. Singapore has a 400% deduction. South Africa has 150% deduction. Brazil has 150% deduction. There are all these other countries. France has huge tax benefits for R&D. All these other countries have huge tax benefits for R&D. The U.S. now is going to actually restrict its tax benefits even further, which we’re behind in the first place. And now the Senate wants to restrict them even further. And personally, it makes no sense to me.

[43:54] I mean, what’s the one thing that you want to encourage in the U.S. is? Innovation. R&D, innovation, right? That’s our strategic advantage. We’re the ones that are coming up with the ideas the rest of the world wants. Now we’re eliminating. We’re reducing these incentives and I think that’s a mistake, but we’ll see. We’ll see what happens. Maybe the Senate will get smart. Maybe the Senate will get smart on the small business. Who knows? I doubt it. I think it’s too much money. This is why I never thought that the small businesses’ flow-throughs would get that tax rate because it’s just a big, big number to give them that 25% rate. So at this point, we’re at about a 32% rate. Well, once it’s all flushes out, let’s get back.

[44:35] Let’s do another follow-up to this because I think because of the, this is a big, these are big changes, big changes. They’re gonna affect people regardless, but the necessity of changing your strategy is gonna be vital. But I would say in the end, it’s interesting to look at this go-around with Trump because I think that one of the points that you made is his fingerprints are on it, right, but his face isn’t. And I would say he’s probably wising up to his marketing because he did a great job of marketing to get elected, but as far as his marketing sense, anything that would have a Trump face on it, doesn’t matter what it does, no one’s gonna, especially the left, isn’t gonna have anything to do with it.

[45:19] And I would say, probably the best thing he could do to get it passed is to come out and say like, yeah, I don’t really like this bill. Then probably a lot of people are like, okay, if he doesn’t like it, I’m going to attack. I don’t know, I mean, you know, I’ll never understand him, but. I know, he’s an interesting guy. He’s an interesting guy, but I mean, you’re right. Once the bill passes, once we get a final bill, because we will, in fact, I actually think we’re gonna get something before the end of the year. So given that, the good news is, we have a new IRS commissioner. The old one was horrible. So the new one hopefully will not be any worse than the old one. And- Are they gonna do layoffs with the IRS?

[45:59] I mean, is that anything like that? No, actually the Senate, just the opposite. The Senate, in their bill, wants to increase the funding of the IRS, which is the right thing to do, by the way. Their funding is way too low. They need increase in funding, not for audits. They need increase in funding for customer service and for their computer equipment. So their IT is way behind and their customer service is just dreadful. So, they can leave the number of auditors they’ve got. They don’t really need… I think we’re the highest compliance country in the world with taxes. And I think that’s not gonna change. You don’t need a lot of audits to change that. I think what we do need though, is we need some better customer service,

[46:45] some better computer systems for the IRS. Fewer opportunities for the thieves to go out and steal your identity and file phony tax returns, et cetera. They have been working on it, but they need to spend a lot more money and time on that. So, it’s just gonna be interesting. Taxes have always been important, but people think, well, maybe they won’t be so important now. Well, yeah, they are. Because even now, no matter which unit, you still got a pretty much 35% tax rate in both bills, some going up to 38 and a half. If you’re over a million dollars, you’re gonna be at 38 and a half or 39 and a half, whichever bill passes. And the estate tax is gonna be important, but not as important. Well, hopefully, I think this is…

[47:34] It’s the issue at hand, right? It’s what’s currently going on in pretty much every major media outlet. But as you mentioned a few moments ago, I mean, there’s bigger issues at hand. I mean, you still have an insanely high deficit. You have spending that’s out of control. So, fiscally speaking, there’s gonna have to be a lot done. But I think it’s interesting just to see that this does fit kind of the train of strategy that Trump had since the beginning. So, it’ll be interesting to see how it all plays out and if it actually does make an impact. But maybe as a final thing, Tom, so Stephen Moore was on here a few weeks ago and he was around with Art Laffer and part of the Reaganomics thing and now had some influence here.

[48:22] And he thinks that this is going to allow us to dig out of this massive deficit and this insane spending. I mean, what does your gut tell you? I mean, this could be a total podcast in and of itself, but maybe briefly, what does your gut tell you about that? Well, my gut tells me it probably won’t increase the deficit. I think it will stimulate enough to not increase the deficit. I mean, it’s projected to increase the deficit at 1.5 trillion, right? Will it increase the deficit at 1.5 trillion? I think probably not. I think it will create jobs. I don’t think we’re gonna be digging out of the deficit with this tax bill. I think we would need a value added tax to do that. So value added tax plus a little reduction in spending

[49:08] and we could dig out, but until somebody gets, this is the first step. I know Paul Ryan’s looking at this. He’s fully aware of how important the value added tax is and he’s looking at this as step one and he’s thinking if we can get a good tax bill out and people get some confidence in the Republicans, they get some confidence in Trump, then maybe down the road, we can actually do a value added tax to actually dig out and have a plan to dig out of the deficit. But I think the value added tax would have to be tied to the money going specifically to reducing the deficit. And I think if it were done that way and put a limit on its time, so once we’re out of the deficit, it goes away or whatever,

[49:48] you kind of come up with this master plan. My guess is Paul Ryan’s got that master plan. I think he’s a really smart guy. He really does understand taxes and I’m hoping that we see something. We really, I know it’s horrible for a tax guy to say we need a new tax, but we do. This country needs a value added tax to compete with the rest of the world. The tax and we need to stop having such cheap goods. Frankly, I mean, we have such cheap goods that we consume so much of the world’s resources and I know I’m sounding Bernie Sanders right now, but I’m gonna channel Bernie just for a minute here. I think he’s right. I mean, we do consume an inordinate amount of the world’s resources. I think that having higher prices

[50:40] is not the worst thing in the world for us. I think we have a way better standard of living than the rest of the world. It’s really interesting to me that there was that Occupy Wall Street movement a few years ago and the whole thing was about the one percenters. Well, the average American compared to the rest of the world is a one percenter. We’re the one percenters compared to the rest of the world even though we’ve got our own one percenters, right? And so what that tells me is if you’re going to complain about Wall Street being the one percenters, then you ought to complain about yourself being a one percenter compared to the rest of the world. So that’s my little political commentary there,

[51:19] but I think that value added tax that creates higher prices is not the worst thing in the world. We can stand to have some higher prices and it would also, it would make, if you combine that with a 20% corporate tax rate, you would literally have companies coming here in droves. I mean, you just, we’d never have an employment issue. We would actually have an issue that, in fact, it would solve the immigration issue because we’d have to make everybody citizens. We’d have to give them all green cards because we need them. Well, it’s interesting, I mean, this is, again, these are like two other, three other podcasts, but it’s one of those, you know, we are becoming an international society, I think because of communication, because of technology.

[52:00] And I really look at, you know, where we want the strategic advantage. I mean, that’s where the incentives have to go. And so I think the corporate tax rate is one thing, but normalizing everything, normalizing everything else will create an environment of competition because if there’s favoritism in one area versus another, you know, you’re going to have competition, but it may not produce the results that you want. But I don’t know, it’s a fascinating time to be alive, to be experiencing all of this. And, you know, I would say it’s such a complex thing in the end, but we’ll do a follow-up. Once it’s all like set and ready to go, let’s do a follow-up. And the good news is I’m writing a new book,

[52:39] so we’ll put it all in the new book, and that should be coming out in April if I can, you know, get going on it. But, and we’ll explain it all in nice, simple terms. All right, Tom. Well, it’s always a pleasure to have you on. I wish you a happy Thanksgiving, and we will circle back toward probably the beginning of the year and do a follow-up to this. Let’s do it. Thanks, Patrick. Thank you for listening to the Prosperity podcast. To take control of your money and have it work for you, visit us at partnersforprosperity.com. If you liked this episode, make sure you subscribe and leave a review.