RUSH: So Trump and his team announced the big tax reform package yesterday, and the tax reform package is massive. It reduces seven tax brackets to three. It takes the top marginal rate from 39% down to 33%. So 10%, 25%, and I think 33% are the brackets. It does away with all deductions except home mortgage interest and the charitable deduction. It gets rid of the death tax. There’s something else that it gets rid of today that I didn’t know yesterday, and it’s somewhere here in my Stack. I’ll mention it when I come across it. That’s good.
Oh! The Alternative Minimum Tax is gone. Do you realize how huge that is? The Alternative Minimum Tax was created way back when because there were some really, really rich people who weren’t paying anything in taxes. They weren’t cheating. They were just using existing tax law. They were not using loopholes; there aren’t any loopholes. Tax law is what it is. Of course, when the news hit that some gazillionaire wasn’t paying anything in taxes, there was shock and outrage and anger all over the place.
So Congress dutifully went into gear and created the Alternative Minimum Tax, which is a tax that was originally supposed to apply only to the very rich, and it was to ensure that everybody paid something regardless what the calculation of their tax was. Well, the Alternative Minimum Tax has now started capturing many more people than it was ever intended to, and when this began to happen, there were red flags raised. And Congress dutifully said, “We’re gonna do get rid of it. It’s now gone way beyond what was intended.”
But then Congress never did get rid of it. You know why? ‘Cause it was bringing in all kinds of revenue that it was never projected to bring in. So it was all considered gravy. It was a bonus. To the point now that the Alternative Minimum Tax snags a lot of people in the $300,000 to $500,000 adjusted-gross-income bracket. And it’s adding to their tax burden. It’s being applied to people who are also paying taxes. Remember, it was originally to apply only to those who weren’t paying anything, and I’m not…
They were not cheating. That’s another thing. If you were able to invest and use all existing tax law to whittle your taxable income down to zero and the amount of tax you owed to zero, well, then you were legal. It was deemed immoral. It was deemed unfair. So the ATM comes in to snare those people. Now it’s snaring people that have no business paying it, and it’s adding to their tax burden. It’s really punitive. It’s one of the most egregious, outrageous aspects, and it’s gone under Trump tax reform.
All deductions are gone except charitable donations and interest on home mortgages. And Snerdley says, “Well, is it a good thing, all the deductions go? There aren’t that many left anyway.” I mean, it’s not as though they’re whacking a whole bunch of them. You know, people… The tax code’s a strange thing, and people’s opinions about the tax code’s a strange thing. I would dare say that a lot of people — I don’t know if it’s a majority. But a lot of people just believe that the rich are able to finagle every year not paying any income tax.
And that they’re using loopholes, and they’re using the power of their wealth to hire powerful tax attorneys and accountants who are able to bludgeon tax authorities into submission and just giving up. But whatever, they don’t think it’s legit. They think the rich are getting away with something that they’re not. The fact is that most… When the top marginal tax rate… Back to 1981 for a moment. When the top marginal tax rate was 70% back in 1981, there were massive deductions and tax shelters that were part of the tax code.
Remember the reason I say that we’re gonna we’re never gonna get a flat tax and we’re never gonna get true simplification is there’s too much power there. There just way too much power. Congress is not gonna give up this kind of power. The social architecture alone. Let’s say you have a constituent who’s a big donor who happens to be in the bearskin rug business. You can write a tax provision that makes the purchase of bearskin rugs tax deductible, as long as you get other people in Congress to go along with it.
They will have similar deals and you all scratch each other’s backs. So oddball, strange, weird deductions and shelters existed. Presidents don’t veto it because the bill ends up being thousands of pages, and you have to take it because what the president wants is also in there, tax rate reductions or tax increases, depending on who the president is. There are all kinds of things like that in there. I don’t know that there was a bear skin rug deduction; just giving you an example. It was that crazy.
Well, with the Tax Reform Act of 1986, a whole slew of these things went away. And the tradeoff was we’re taking everybody down to three tax rates here. Actually, it was two. Some people paid a 31% rate based on some odd calculations, but it was, what, 10 and 28% or 15 and 28%. And they broomed most of the deductions. Well, now we’re back up to seven brackets, but those deductions that were eliminated have not been reinstated. I want to call your attention to Trump’s tax return that was made public.
Remember Rachel Maddow breathlessly promoing all night that she had Trump’s tax returns? The leftists, their tongues were on the floor. (panting) They thought they had Trump nailed! They thought they were gonna prove that Trump’s got business deals with the Russians and the ChiComs that would disqualify him. That’s why they want his tax returns. So what was the tax year? Was it ’85? I forget what it was, but Trump paid way, way more than any president ever has, not only in real terms, but in terms of percentage.
Trump paid something like $38 million in taxes on an income. I forget what the income was. A $150 million. He paid $38 million on $125 million? Nobody pays $38 million. I mean… That’s wrong. My point is, people now do. The deductions are gone. There’s no way around it. These loopholes and so forth, I mean, they just don’t exist, not nearly to the extent that they did. Where do you think all this revenue that Obama collected the last eight years is coming from? When you…
Folks, when nearly 40% of all income tax revenue is paid by 1% of the population, do you really think there are a lot of deductions out there that they’re using? One percent of the population paying 40% of the entire take? So it’s not nearly the tax code that it used to be in terms fraught with multiple opportunity for shelters and deductions. There are some. The trick… The trick is to whittle your income, your adjusted gross income down. And this is one of the things that some people understand. When you have… It’s the difference between earned income and capital gains.
Somebody retired who is worth $2 billion, there’s income on that $2 billion. If you can get most of it cast as capital gains, you’re paying 15% on it. But you’re not paying on your wealth every year. We don’t have a wealth tax, yet. We just have an income tax. And the trick for these guys is to whittle their taxable income down as low as possible, and that’s where most of the… I call them “tricks.” That’s where most of the opportunities are, if you have a tax lawyer who really knows that code — and it’s a massive tax code. It’s multiple volumes. But there’s really no way of getting out of paying the percentage you owe based on your income.
The trick is whittling your income down.
That’s why carried interest is the rate that hedge fund people pay. That’s 15%. Well, hedge funders, as far as most people think, are all multiple billionaires, or at least billionaires, and they’ve got the special deal, carried interest, where they don’t pay 39% on what they earn; they pay 15. On some of it. On a percentage of it. Trump even railed against it during the campaign saying he was gonna get rid of this carried interest business ’cause he says the hedge fund guys are getting away with bloody murder. And it was just a way to whittle down the taxable income, ’cause that’s probably the most effective way of paying as little as you can.
However, if you’re employed and you get W-2s, there’s no way that you can whittle away your income. There’s no way you can change what it is. It is what it is by virtue what your employer pays you. But people that are self-employed or retired, the John Edwards trick. It’s not a trick. It was hypocritical. Remember John Edwards (imitating Edwards), “There are two Americas. There’s a poor and a rich America, and I am for the poor America.” He ran for office on this whole concept there were two Americas and that he was the guy who understands how bad it is for poor people in America, it’s not fair, it’s not right.
Well, then he had to release his tax returns and we found out the guy was doing everything he could to avoid paying Medicare taxes. Here’s how you do it. The first thing you do — well, let me explain the rates first. You have your income tax rate, whatever it is, based on your income. Then you have your standard deduction, whatever you get to lop off of that. Then you have the payroll taxes, which 12%, up to a ceiling of — up to a floor of $135,000. So basically you’re paying 12% in addition to your income tax rate.
Now, Medicare was added to this only recently. I said ten years ago. And the Medicare rate not part of the FICA, not part of the payroll tax. Medicare, don’t know what the exact rate is now, but it’s another 4%. Well, if you want to organize yourself as Edwards did, and a lot of people do, as a subchapter S, what you end up doing, you create a corporation that is you. Mom-and-pop operation, many subchapter S’s are small business that file their taxes on a personal return every year, and what you get to do, you get to pay yourself a salary.
Let’s say you’re subchapter S, you’re an independent contractor, you’re painter, you’re a poet, you’re a songwriter, whatever, and your income for the year — just gonna make up a number for the ease of understanding — your income for the year is a hundred thousand dollars, but you don’t pay yourself that. You pay yourself a salary of, say, 25. That’s what you would pay income tax on and that’s what you would pay your Medicare tax on.
Now, depending on what you do with the balance, you could end up paying the rate on the full hundred thousand, you’re gonna pay a tax rate on the full hundred thousand. But only paying yourself a portion of what you earn — it’s an accounting nightmare. You’ve gotta be able to do the accounting or have your accountant do this for you, because you’ve gotta issue yourself W-2s and all this, but the gross of what you’re paid comes in, but in terms of salary for tax purposes, you don’t pay yourself that; you pay yourself 50, 40, whatever your accountant advises, and in that way you avoid primarily paying all of the Medicare tax.
Now, there was no way Trump was a sub-S on that tax return, no way he would have paid 38. He was filing taxes: straight earnings, here are my deductions, here’s what I owe. To end up paying $38 million on an income of 121, 125, he wasn’t playing any games whatsoever. There could be any number of reasons for that. I know all kinds of people that pay more than they owe. They don’t want to be targeted. If they are targeted, they want to be able to demonstrate, “Hey, if anything happens, you owe me, I don’t owe you, I’ve been overpaying.” That’s how afraid a lot of people are of the IRS.
I mean, every taxpayer, particularly every independent contractor, there are different strategies and different ways of doing all this. But you cannot file sub-S if you’re an employee somewhere. That becomes your status. You have to be a small business owner or an independent contractor. As such, the IRS has a list of 10 qualifications that you have to be able to prove you meet in order to classify, qualify as an independent contractor. When you are an independent contractor, you get paid the gross. Nobody withholds anything when they pay you. And then you have to file quarterly estimates based — you have to get real close so people overpay on the estimates.
And once you establish a quarterly estimate for a year, the IRS expects that that’s what’s gonna be — you have to at least pay 90% of that the next year whether you earn more or less. But the least flexibility is for people that are W-4, W-2 employees. If you’re 1099, if you’re independent contractor, that’s where the flexibility exists. I’ve always thought the fastest way for tax reform, you want to really have it happen next year, eliminate withholding and make every taxpayer actually write the check monthly, quarterly, weekly, whatever, to the IRS, actually pay their taxes like they pay for anything else.
And that way people — ’cause most people never see. They see the net, they never see the gross. They never see the money that ends up in Washington and their state capital as taxes. If they were paid the gross and had to write those checks, you would see tax reform, and it would have happened yesterday.
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RUSH: I saw an email, “Rush, what happens to the other $75,000 if you only pay yourself 25?” You pay yourself that as a bonus. It’s not income. Everything’s about income when it comes to taxes. Everything has a different rate. Capital gains is a different rate than ordinary income. Earned income is different from ordinary income. It’s a complicated maze to figure all this out.
There are a lot of reasons for doing sub-S. I mean, there are security reasons, there are privacy reasons, you can name your company whatever you want it to be; it’s not you. There is a benefit to being able to file a small business on a personal return, which is what a subchapter S allows you to do, and Trump referenced this, by the way, or his people did yesterday in tax reform as having great benefit to small business, mom-and-pop operators who file a sub-S.
If you gross a hundred grand, you’re an independent contractor, you gross a hundred grand but you only pay yourself — you elect whatever you want to pay yourself. Your tax accountant will advise you, or you will do it yourself based on your knowledge, you pay yourself 25 or 30,000 a year, and it’s on that that you pay income tax and your Medicare and your payroll tax. And then the other $75,000 is a bonus, or whatever you want to call it. You pay taxes on it; it just is at different rates.
One of the primary objectives now — and everybody has a different reason. I know that many tax accountants out there are probably picking holes in things I’m saying. For you tax accountants, I’m trying to be as generic here as I can. But in the case of John Edwards, where he was caught up with hypocrisy was he had arranged himself as sub-S, which is nothing illegal about it. Everything about it was perfectly fine. He just didn’t want to pay the full 4% Medicare tax. He wanted the government to get as little of his money as he could.
The hypocrisy was he’s a Democrat out there telling everybody they weren’t paying enough and the rich aren’t paying their fair share. Well, he’s a rich guy and people got hold of his tax returns and found out he was doing what everything else does, trying to pay as little as possible. He’s a gigantic hypocrite. He wasn’t breaking the law, but he wasn’t behaving to type. He got caught up in it, and that began his problems, by the way.
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RUSH: Oh, by the way, Trump taxes I was talking about were 2005. On $150 million adjustable gross income, and he paid $38 million in taxes.
That’s way above the average. For people in his bracket, best I can tell, the average effective rate — and the effective tax rate is a much different tax rate than what your bracket is. The effective tax rate is a whole different calculation based on your entire return. And I’m not even gonna try to explain it. But the bottom line is that Obama’s effective tax rate is anywhere from 19% to 24%. Trump’s in 2005 was way beyond that, way beyond.
Trump paid so much in taxes that not only was MSNBC shattered and shocked, other people couldn’t believe it, because he paid far more than appeared to be necessary. But if you just go by the published rates, he was right in line. So it created a lot of curiosity.
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RUSH: Now, look at this, I got a couple stories here from CBS News. The headline is all I care about for this story: “More Americans Think Trump Will Increase Their Taxes Rather Than Decrease Them.” This is a poll. What’s the poll? Is it CBS? I don’t know. It probably is a CBS poll. Now, after the way this was presented, how in the world can anybody think that? How can anybody think that Trump’s massive tax cut proposal is going to increase their taxes? Who in the world thinks this, and why?