Ask an expert: Greg Geisler examines burning questions as the Tax Cuts and Jobs Act takes effect
A sweeping new tax code is now the law of the land.
Significant cuts to the corporate tax rate, a larger standard deduction and changes in tax rate brackets are all part of the Tax Cuts and Jobs Act. But what will these changes, as well as many others, mean for individuals, businesses and the American economy?
UMSL Daily recently unpacked a few of these tax topics with Greg Geisler, a nationally lauded professor of accounting at the University of Missouri–St. Louis. Geisler, who received a PhD from the University of North Carolina–Chapel Hill, teaches courses on federal income tax, advanced federal income tax, and taxes and investments.
As you review the new tax code, what do you predict will be some of its greatest impacts?
We’re going to go from 45 million people itemizing their deductions to less than 10 million. For those more than 35 million Americans, it’s going to be a lot simpler to file their tax returns because they no longer have to calculate six different categories of itemized deductions. They just take a number called the standard deduction, which is an artificial number that’s going to be $12,000 for someone single and $24,0000 for married couples filing jointly, and use that instead of hunting for all of their itemized deductions.
While many individuals and households will have a simpler process for filing taxes, will they be better off financially?
Next year, compared to 2017, most people are getting a tax cut. It’s not a big tax cut unless you’re very wealthy or own a very profitable business. In those cases, it is a big tax cut. More people are going to pay less tax in 2018 than 2017.
Looking a decade down the road, will many individual Americans be better off in 2027 than they were in 2017?
The law doesn’t cut taxes too much over a 10-year window. They put a lot of gimmicks in where some of these tax breaks are going away in 2025 or 2026. But just because you’re going to pay less tax in the next seven or eight years, doesn’t mean you are going to pay less tax 10 years from now. The Republicans are hoping that they can still have enough power to extend these tax cuts further into the future. Because of this, it gets too iffy to speculate if someone will pay more tax 10 years from now.
As you mentioned, some of the individual provisions expire at the end of 2025 while the corporate provisions are permanent. What is the reasoning for this difference?
The Republicans set a target of $1.5 trillion in tax cuts over the next 10 years, and they had to meet that target. That’s why they decided to have a lot of the tax breaks for individuals expire near the end of that 10-year window. Their big goal was to cut tax on corporations because the U.S. is no longer competitive with all of the other industrialized nations as far our tax rate on corporations.
It was 35 percent, and every other industrialized nation had a lower corporate tax rate, so that put U.S.-headquartered businesses at a significant disadvantage. Now the average for industrialized countries is around 26 percent, and we’re down to 21 percent, which makes us more competitive.
What are your thoughts on the theory behind the corporate tax cuts?
I have a few thoughts. First, U.S.-headquartered multinational companies were definitely at a disadvantage, so Republicans solved that issue. But this is what is not widely known: U.S. multinational corporations who have been effectively avoiding U.S. income taxes have to pay a one-time, 15.5 percent tax on after-foreign income tax profits. Such profits have effectively avoided U.S. income tax for years or decades.
This one-time tax on foreign profits could bring in as much as $400 billion in U.S. income tax. U.S. corporations are not happy about that, but it truly gets many of them who have been too good at avoiding tax to pay their fair share.
Additionally, we are completely changing our corporate tax system. It used to be based on a U.S. corporation’s worldwide income, and we were one of the only industrialized countries to tax corporations this way. The loophole was that a U.S. corporation did not have to pay tax on its worldwide income until it paid a dividend back to its U.S. parent corporation. So what did these corporations do? They never paid a dividend back to their U.S. corporate parent and stashed those foreign profits overseas indefinitely.
Now we’re changing to a territorial system where it doesn’t matter how much profit corporations have overseas. All that matters is their profit in the U.S. This game, which has been going on for decades, has completely changed. It’s a whole new world for U.S. corporations as far as their taxation goes.
What will be the economic impact of these corporate tax cuts?
It truly will not pay for itself. Mainstream economists who have analyzed it all agree that it’s ultimately going to result in a tax cut for U.S. businesses. The key question is what are the U.S. businesses going to do with this additional cash from paying less tax? That remains to be seen.
Much of your research focuses on how taxes impact investment decisions. As the standard deduction nearly doubles, what changes should individuals consider in their investment choices?
It really does not change investment choices by individuals at all. The long-term capital gains tax rate and qualified dividends tax rate still remain significantly lower than the ordinary tax rate. I’ve looked at that, so it does not change the investment strategy by individuals.
Some of your recent research focuses on health savings accounts being the most tax-preferred retirement-savings option. Rules for HSAs were untouched in the tax reform, so has your advice regarding HSAs also remained the same?
Yes. My advice on HSAs is still if you have a high deductible health insurance plan to max out what you contribute to your HSA.
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