Individual Tax Reform: The Trump Administration’s Proposal and the ARM Industry

October 10th, 2017

Following the GOP’s failure to develop a legitimate replacement bill for the Patient Protection and Affordable Care Act (ACA), repeal efforts have fallen to the wayside as the party, which fully controls both chambers of Congress and the White House, now turns its focus towards U.S. tax reform – a rather daunting task to say the least – for fiscal year 2018. At one extreme, GOP congressmen consist of budget hawks that are focused on preventing any changes from going into effect that would increase the budget deficit that currently sits at $19.85 trillion as of August 31, 2017. At the other end of the spectrum, you have supply-side economics subscribers that want to see tax cuts go into effect which they believe would lead to greater consumption and employment. They believe this would, in turn, increase tax receipts, thereby reducing the budget deficit. However, for tax reform to come into play, the GOP will have to compromise amongst each other and develop a proposal that both sides can agree upon, especially if they opt to progress without bipartisan support from the Democrats. This, of course, raises the question of whether or not the recently released Trump Administration tax reform proposal is good for the economy and, more importantly for us, the accounts receivable management (ARM) industry.

The Trump Administration’s tax reform proposal is broken into two distinct segments: individual and corporate. For the purpose of our analysis, we will break our review of the proposed tax reform into two separate articles. The first of which examines individual tax reform while the following discusses proposed corporate tax reform. This segmentation will allow for a more thorough analysis on the effects each proposal will have on the economy and ARM industry.

As the tax reform proposal currently stands, it’s unlikely to gain full GOP support (numerous GOP senators have already voiced their displeasure with the proposal in its current state), let alone bipartisan support, because of its approach, ideology, and overall effect on the economy as outlined below.

First, it fails to outline how changes to the individual income tax brackets on the basis of tax tiers along with increases in deductions without other offsetting adjustments to government expenditures would not lead to a budget deficit increase. The math on this subject is quite simple; If you decrease the level of tax receipts from individuals by revising the tax tiers and increasing deductions, while leaving all else the same, you will see a budget deficit increase. Clearly, the Trump administration is working on the belief that the changes will yield economic growth, but lack details and support for this conclusion. As such, more conservative GOP budget hawks would not support the legislation.

Second, members of the Democratic Party will likely flat out reject the proposal on an ideological basis due to the minimal gains it provides for lower-income earners and rather substantial benefits for the wealthy. Once again, the basic math suggests that the lowering of the tax bracket tiers would create greater benefits for the wealthiest individuals since the top tax rates really aren’t applicable to middle-income households. Additionally, the Democrats, ideology aside, will have little reason to vote in favor of a tax reform bill that doesn’t seek their involvement. While this may sound fickle, it’s a relatively normal and expected reaction and aligns with many prominent GOP motives to move forward without the Democrats’ support, so neither side can really point fingers in this instance.

Lastly, there’s little to suggest the current proposal will produce any meaningful benefits for the economy as a whole, or ARM industry in particular. Most economic analyses focus on how to increase the disposable income of the typical middle-income households since these individuals make up the majority of U.S. households and are more likely to engage in activities that lead to economic growth. In fact, Gary Cohn, Director of the National Economic Council and chief economic advisor to President Trump, stated that he can’t guarantee taxes wouldn’t go up for some middle-income households, while also suggesting that the net gain for a “typical” family making $100,000 annually with two kids would be about $1,000. These remarks came under fire from the media, think tanks, and numerous other groups since they suggest that Gary Cohn is wildly misinformed. The “typical” middle-income household in 2016 didn’t make anywhere near $100,000. According to the US Census Bureau’s data released last month, median household income for all households was $59,039 and $75,062 for all family households (all households includes everyone in the U.S. while family households limits its analysis to a group of two people or more, one of whom is the householder, related by birth, marriage, or adoption and residing together). Additionally, while few people would complain about having an extra $1,000 per year, most would also agree that an extra $83.33 per month isn’t going to change much with their finances, leading to a minimal effect on economic growth.

Ultimately, the tax reform proposal for individuals put forth by the Trump administration has very little, if any, chance of survival in its current form and will need to go through a number of revisions. Additionally, if true reform is something President Trump desires, then he and the rest of the GOP would have to involve Democrats, otherwise, its effects would probably be so muted due to budget reducing offsets that it wouldn’t really be worth exploring.

From our perspective, the greatest opportunities for tax reform, while bringing in bipartisan support, involve forgoing efforts to alter the tax tiers, regardless of how great that sounds. Instead, the Trump administration and GOP congressmen should focus on adjusting income ranges and deductions available to households, which are efforts that would likely gain bipartisan support. Here’s how it could work:

First, concerning income ranges, by increasing the level of income for each individual tax bracket by a flat dollar value or margin, you would effectively reduce the tax rate for all individuals since a greater percentage of income is taxed at a lower rate. However, wealthy households would still be subject to the current top tax rate tier of 39.6%, but would have a lower sum of money taxed at this rate due to the marginal nature of how income is taxed. Under this model, lower-to-middle-income households would be the greatest beneficiaries of tax reform, especially if it were a flat dollar increase to the tax rate tiers, while wealthier households would benefit only marginally. This seems like a win-win for the majority of GOP and Democratic Party members.

Second, increases to the standard deductions would yield more significant tax savings for lower-to-middle-income households while only marginally benefiting wealthier households since the deduction is a flat dollar value that reduces the level of taxable income. As such, wealthy households would likely maintain an existing itemized deduction policy so the real benefit is targeted towards those most in need of tax reform.

Lastly, an elimination of the “marriage penalty” would likely gain broad bipartisan support. Under the current tax system, married couples filing jointly have a tax bracket with more narrow value ranges that forces them into more costly tax rate tiers than if the couple were living together, but never married. Quite frankly, it makes no sense to tax someone more for the right to be married, so this is an area that most should agree upon as a means to simplify and decrease taxes on lower-to-middle-income households.

We believe the aforementioned changes would have the greatest benefit on overall economic consumption since the lower-to-middle-income households are more inclined to spend the increased tax savings. Additionally, wealthy households that benefit only marginally will still incur a benefit, but the level they pay in taxes would remain relatively high under the U.S.’ progressive tax system. As a result, the net effect on tax receipts from individual income tax filings should, in theory, be far lower than a reduction to the tax rates themselves. All around, this should provide a greater benefit to the economy and better appease some of the GOP budget hawks.

Regarding the ARM industry, economic growth as-a-whole and increases in disposable income are highly correlated with increases in consumer credit utilization and other factors that support industry growth. Therefore, what is good for the economy and majority of the U.S. households is also good for the ARM industry so a tax reform proposal that is truly focused on benefiting lower-to-middle-income households by properly addressing wealth distribution is what’s best for everyone.

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