A Tax Reform For All 

The Tax Cuts and Jobs Act (TCJA) of 2017 made extensive changes to the Internal Revenue Code (IRC), providing several key benefits. One of the most impactful was the reduction of the corporate tax rate from 35% to 21%. This legislation increased the standard deduction to $12,000 for single filers and $24,000 for married couples filing jointly. And the TCJA expanded Section 179 expensing, allowing businesses to immediately deduct up to $1 million in capital investments, with a phase-out threshold of $2.5 million. Unfortunately, many have argued that these kinds of ‘trickle-down’ policies - where we give to the rich assuming they will pass along those savings to the rest of us - don’t really work and end up hurting the middle class. And it’s really important to remember that these laws were passed during one administration, but persist because the law does not expire until 2025.

This Too Shall Pass: The TCJA Does Expire

The benefits enjoyed by regular workers under the TCJA are temporary, expiring after 2025. In contrast, corporate tax cuts, such as the reduced corporate tax rate from 35% to 21%, are permanent. This creates a scenario where, over time, individual taxpayers will bear a greater tax burden as their temporary reliefs expire, effectively offsetting the benefits that large corporations continue to enjoy.

For example, in 2020, three years after the TCJA was enacted, the richest 5% of taxpayers received $145 billion in tax cuts. 72% of the benefits went to the top 20% of income earners. In contrast, the bottom 80% of taxpayers saw significantly smaller benefits. This result appears to be a feature, not a bug.

Prior to the TCJA a construction worker who was assigned to a remote temporary worksite could deduct the mileage for commuting to that site. So if you were to work at a temporary job site fifty miles away from your house, you’re commuting a 100 miles a day. Assuming 250 working days, that’s 25,000 commuter miles that can be deducted at $0.65 a mile - or a $16,250 deduction. That’s not allowed anymore.

While large corporations have and will continue to benefit from the TCJA, the small businesses that are the backbone of our economy were hurt in a number of ways. Despite some seemingly attractive benefits like the 20% Qualified Business Income (QBI) deduction, this deduction, under IRC § 199A, is complex and limited by income thresholds, especially affecting service-based businesses.

TCJA’s war on deductions like the state and local tax (SALT) deduction, further increasing tax liabilities for many middle-class taxpayers, particularly in high-tax states, has been widely unpopular. Critics argue that the TCJA disproportionately benefited corporations and the wealthy, with the long-term cost shifted onto regular workers.

The Veruca Salt Effect

It’s human nature to want things now not worrying about the consequences later. Famously Veruca Salt just could not wait for her golden egg, she wanted it now - consequences be damned! And we knew that the TCJA would cause tax headaches for regular people soon after it went into effect.

We knew from the jump that the “math ain’t mathing” on the promises of the TCJA. Yet, tax relief and tax reform were policies everyone wanted in 2016. And they wanted it now, consequences be damned. Behavioral economics all this Present Bias 

This phenomenon describes our tendency to overvalue the present and discount the future. We believe that receiving a benefit now is more valuable to us in the present than we imagine it will be in the future. Conversely, we perceive a ‘cost’ as far greater today than we imagine it will be tomorrow (we wait for the shoes to go on sale).

As a consequence this bias sees people frequently make choices that contradict what their future selves would want. We knew that the TCJA would give short-term payroll tax relief, we knew that we’d all end up paying more, we knew that some of the best deductions would be eliminated, and yet, we took the short-tern benefits because we imagined the cost of remaining with the old tax code as much greater. Think of a person who is aware of the risks of smoking and is trying to quit but gives in and has a cigarette. The benefit of the cigarette in the present seems high, while the cost in the future seems low. Of course, the smoker’s future self would disagree.

This election season, we’re going to need to be aware of our human nature - our biases - because larger forces will try to prey on those common misconceptions we all have as humans. The best thing we can do is pause. When promises are made and plans described, consider which of your natural human biases is being targeted. Because they can’t get us to act if we see through the gimmicks and remain in control of our wits.

Now then, let’s look at what’s coming up this week.

Jackson Hole, Retailers, and Big Tech

Jackson Hole Symposium. A gathering in Wyoming at the end of this week will hold the world’s attention. The Jackson Hole Economic Symposium, organized by the Federal Reserve Bank of Kansas City, is a key annual event where global central bankers, economists, and policymakers discuss major economic issues. Since its inception in 1978, it has become a platform for announcing significant monetary policy decisions, often influencing global markets.

This year, all eyes are on Federal Reserve Chair Jerome Powell. Analysts expect Powell to address the Fed's approach to managing inflation while supporting economic growth. With inflation still a concern and signs of economic slowing, Powell’s guidance on interest rates is highly anticipated. The prevailing feeling in the market is

Can retail gains keep gaining? This Friday that just passed, we got information suggesting consumer sentiment is positive. This week we get earnings reports from Lowes, Target, TJ Maxx, Macy’s, and other retailers. Recent earnings reports from the retail sector offer a mixed yet telling snapshot of the U.S. economy. As of August 2024, 71% of retail companies that have reported their Q2 results have exceeded earnings expectations, though revenue growth remains modest at 3.5% year-over-year. This indicates a resilient consumer base despite ongoing economic challenges, such as high interest rates and persistent inflation.

What’s really interesting about Lowe’s is that recently Home Depot reported better-than-expected earnings, but with weaker same-store sales, reflecting cautious consumer spending on big-ticket items. This trend suggests that while consumers are still spending, they are becoming more selective, particularly when it comes to discretionary purchases. This week we’ll see if the mixed signals from consumer behavior continues or if we see signs of headwinds.

Big Tech could add fuel. We get a rash of big tech firms reporting earnings this week, names like Snowflake, Zoom, Palo Alto Networks, and Workday. Recent technology earnings underscore both resilience and challenges in the sector. Snowflake reported a 37% year-over-year increase in product revenue, reflecting strong demand for cloud data services, but concerns over slowing growth and operational costs linger. Zoom, facing post-pandemic normalization, will release earnings next week, with investors watching closely for signs of renewed growth amidst increased competition

These earnings reports highlight how tech companies are navigating a slowing growth environment and higher costs, offering insights into broader economic conditions.