 Yeah, is now a good time for tax reform here in community matters with tax attorney Roger Epstein. Welcome to the show Roger. Hi Jay so nice to be here with you, even though we're 6000 miles away. We could be next door it's the same. So let me let me ask you to follow up. Okay, on conversations that you and I have had. Over the years since 2017. There was a tax reform act and it was called reform that was euphemistic. Donald Trump put in place. He sort of crammed it down the throats of Congress and the public back in January of 2017 was the first thing you do. So, like just to summarize our conversations in the past. Was that tax reform. Was that the kind of tax reform we need in this country. It was definitely tax reform. In fact, many, many people who aren't in a tax industry. Don't realize that was the largest perform bill, the largest change in the taxes since 1986. That's how many changes were in there. Changes to the way we deal with international business. Changes in the tax rates and all all all of the changes virtually that we've had in the tax law since since Reagan became president have been to lower the taxes on the wealthy. The theory under republicanism is if if the if the businesses big business pays less in tax. That will have more money into circulation. They can use the savings to hire people to expand. And that will create a rising tide which will raise all boats. Isn't that the trickle down theory that president Hoover used in the late 20s which resulted in one of the factors that resulted in the depression. Yes, it yes it definitely was trickle down economics were also discussed by Reagan. Eisenhower talked about trickle down economics. The truth of the matter is and it doesn't take much investigation to find it. We have dramatically skewed our our income inequality. In the last 40 years, really starting in 1971. With a republican paper if you will from Louis Powell, who before he became a Supreme Court justice was the lawyer for the tobacco industry. And it as a as a back slap to the 60s of the liberalism of the 60s. He came up with a plan to essentially avoid communism and socialism you know what they were what the conservative was worried about and turned it into a domination of big corporations and the government together at the expense of the worker that we don't have unions anymore. The tax rate when I first started in the tax industry I was an internal revenue agent in 1967. The highest rate was 70%. It had just come down from 90%. So people were doing fine actually those days were the best economics in the history of the country. And people were on an equal playing field. When you got out of you could go to college for nothing. State University was $200 California schools were free. If you graduated from a California high school when you got out of school, you could buy a house. I remember making $10,000 at age 24, and being able to buy a house for $15,000. So the key is the relative value of services and capital was much more closely connected. So when I say I could buy a house for a years and a half's wages. Today, if you make $35,000, you can't buy a house for 10 times or 20 times. The relative value between what you can earn for your services and what you have to expend to buy capital goods has gone so dramatically out of skew that you can't really today even work hard enough to create capital to buy into the real estate market, which is the main, the main thing I'm talking about as a comparison, and the guys at the top J in the in the late 60s early 70s, they were making 30 or 40 times what the guy on the shop floor was making. Today, it's 400 to 1000 times more. So the guys at the top get it all. The guys who have the ownership interest and the capital, they get it all, but it hasn't trickled down, but it's trickle down. It hasn't flow down to the guy who is out there working. And if your services aren't tied into capital like a real estate broker, or an investment banker, or actually law firms now, big law firms have their fees tied in with the size of the project they're working on, not on an hourly basis. Interesting. And, and, and so we just, we've created what our founders did not want to have, which is an aristocracy of the rich. Let's, let's go to the question of what, what effect that the tax reform act of January 2017 under Donald Trump have on the process you have just described. I would say it was just another nail in the coffin. What happens is we don't have enough money to provide for the safety net that Ronald Reagan talked about for our people, because we're not the wealthy people aren't paying in their bear share. I don't care about their enough to keep the country going. Well, what's interesting is a right after that bill was passed, right after Trump signed it the light was the day after. What's his name, Paul Rand, Rand, one of the one of the Ram, Rand Paul, Rand Paul, immediately the day after that bill passed, he said oh gee whiz, we're not going to have enough money to fund social security. We're not going to have to cut back on the safety net the day after. And so that meant they all knew the Republicans all knew at that time. They were cutting, they were cutting benefits to the people. I'll tell you, I'll tell you some, I think devious things. Okay. There was a push for many years in the 80s and 90s for a flat income tax. Everybody was going to pay 15 or 20% of their income, which I've had many people not just rich people tell me well isn't that fair. All right, the concept in the income tax is a graduated rate, because the more money you make number one the more you can afford to put in. Number two, the more you have benefited from the system. So let me give you an example, a family making $50,000 a year is asked to pay a 10% flat tax $5,000. Well they just at the margin now they're they're actually in Hawaii of course they couldn't possibly live on $50,000 a year, even two people much less a family of four. $50,000 hurts like hell. Now they got $45,000 back. The guy making a million dollars paid in 100,000. And he's like what do you mean I didn't pay enough. I paid 20 times what that other guy paid. Well he's still got $900,000 left. I think we got to take all his money. I'm just saying, he's got $900,000, and the other guy's got $45,000 and can't buy a food on the table. So, what are we thinking of the reason we created a graduated tax system is just for that purpose just for that concept of of spendable funds available funds. And if you don't take it from the guy who has the 900,000 left and take another 100,000 or 200,000 so he's only got $700,000 left. He benefited from the American system that allowed him to make that money. Did he benefited from all that's good in the country. The fact that our courts are legitimate the fact that that supply chains are legal the fact that people follow contracts. The fact that that we have created a system of capitalism, which is very good. When I talk about how things were in the 60s and the 70s Jay, we haven't changed the system. We haven't gone anywhere we were capitalist then, and people were paying 70,000 70% and we're capitalist now. Let me change the subject a little bit Roger. You know one thing that's happening in the country in the various states, especially the red states is there. They're giving up any any pretence of having an inheritance tax. Most recently we talked to somebody from Nebraska they're trying hard to knock that off. So, I think after a while you can see more and more states knocking off. So what sometimes is left as a fairly modest inheritance tax. At the same time, the federal government used to have a much more robust estate tax, which was at higher rates and lower lower exemptions. And now we don't have that anymore and the estate tax reaches only a small number of people. Very rich people may have to pay a state tax but most most rich people don't. The bottom line is you can achieve aristocratic wealth over a few generations because nobody is taking that back from your, you know you have kept your $900,000 or whatever number you were using. And you keep it, and the estate tax doesn't really take it away from you, and it goes from generation to generation. What, what kind of policy is there and what has the trend been over the past, you know, few decades. Well, we, we started when I the exemption level is the key. Because the rate has always been pretty high 4050%, which is substantial. But the exemption, when I first started in 1967 was 60,000 30,000 for the wife and 30,000 for the husband. Today, it's 22 million. Right, we don't really have an estate tax federal, and some states are lower Hawaii has a significant estate tax but it's still I think three and a half or five million. So it's not 60,000 and again 60,000 was was a lot higher number than 60,000 is today, but it wasn't, you know, whatever that number is 1020 100 times more. Okay, is more than 100 times 200 times more. Okay, so it is. Trump basically eliminated the estate tax by getting the Republicans to call it a death tax by increasing the exemptions from it was it was the big jump was in the second Bush administration. And he pushed it from about 4500,000 up to three and a half million. And then Obama, for some reason, I will never understand or I hope I will understand someday. He could have allowed he could have done nothing and allowed it to go back to a million. But instead, he pushed it to 5 million. Then Trump came in, and it's 5 million plus a cost of living increase. So it went to it kept going higher. He doubled down on it. He doubled it. And now it's 11 and a half for each person. So 22 plus million dollars, which, you know, how many people have that kind of money very you're talking really up there in the one or 2% half a 1% In its own way, this evolution is worse than the evolution you describe in the income tax, because it allows the accumulation of enormous wealth. Yeah. The estate tax got passed in 39, I think, just before World War two. And it again, it part to raise money, but also to pay for the to keep us from having this aristocracy of the rich. And I think it would be hard for a historian to look back and not believe that the founders of this country were very much against aristocracy, the concept of individualism of equality. It was meant to eliminate the system in Europe, and it was very unique. And we've allowed it to creep back in has been Franklin was asked after the constitutional convention, what kind of government do we have, he said a republic, if you can keep it. Now we're losing it now for many reasons but on this score economically, we're losing it because when you have the money, you also have the power. And I'll tell you double down on the estate tax because here's something that many tax lawyers understand and accountants, but for some reason the Republicans have been able to hide this. When they were looking what bill was this I think it was the 2000, the 2017 bill when they when they increased the tax rates. They increased the exemption for state tax, Mitch McConnell said, we're looking everywhere to pay for this. One of the ways they paid for it was to eliminate the moving expense deduction for employees whose employer makes you move from Cleveland to New York. Another way was to require employees to pay a tax on a free parking that the company gave them, as if it was additional income that's how they pay for it. Now one thing that they somehow seem to miss. When they put in the estate tax, they said, look, you're going to have to pay a 40 50% estate tax on the value of what you own. If you paid $100 for something and now it's worth 1000. There's a capital gain tax and income tax to pay. So it's not fair to hit you twice. So what we're going to do, if you include that property at $1000 pay your estate, you don't have to pay your state just included in your estate. Then we're going to raise your tax basis to the what you put in the estate $1000 and if you sold it the next day you wouldn't have to pay an income. So you have $100 you have a built in gain of 900 to current value. You're in the estate tax, and now it raises up. So you can take, okay, they now we got a $22 million base. How many people in the country own property that has appreciated from 100,000 to a million. Or we were talking about the increase in capital value. Okay, nobody except the upper upper who knows what the percentage is. He's a state tax, but somehow Mitch, and the most brilliant tax lawyers that he has at his hands in the joint committee on taxation couldn't remember that they didn't eliminate to step up in basis. So now as a rich person, not only don't you pay in a state tax, when you die, you get a favor from the government that all of your income tax on your built in capital gain goes away. Thank you, Uncle Sam. Well, you know it sounds to me just from this really short discussion that it's been political. It is ideological. It is more political more ideological today. The Republicans over the past few presidents and generations have largely responsible for these trends. These trends are really anti anti democratic and anti social safety net. So the question I put you, Roger is, is it time for tax reform. And what does that look like. It's way beyond time for tax reform. The wealth gap in our country, I think, is significantly related to the income tax and the estate tax. You can go back and look 50 years and see when when the rates were much higher, we had an egalitarian society where you could live the American dream, work hard, study hard, make enough money to have a decent living our kids today know that they're never going to own a house unless their parents give them a house or a down payment for it. So is it time. Yes, it's time. There's lots of ways to do it the simple way is to just start raising the rates. There is a remember this an income tax is only payable if you have income. Even after COVID, it doesn't hurt the companies that say, hey, business was terrible. Okay, then you don't have any income. Don't worry about what the rate is, but for those billionaires who increase their wealth by 50% during COVID. Why the hell shouldn't they be paying 70%. Publicans have another thing that's really sleazy. They say, look, our corporate tax rates are higher than any place else in the world our income tax rates are so high. They don't acknowledge that every one of those countries with a higher rate and some, I mean with a lower rate and some even with higher rates have a value added tax. All of Europe has it all of Japan has it. And so I listened to people in the Treasury Department, they say if you want to lower corporate tax rates, you're going to have to institute a back. The Republicans know that they don't care, because if you have a million dollars, you can only spend 300,000 anyway. And so what do you care about a sales tax, you're reinvesting, not in goods, not to stimulate the economy, like the guy at the bottom would like the guy who's an employee would, but you're, you're making extra money. So you can raise bid for more capital and raise the price of capital against the guy who doesn't even have enough money to make a living. I mean, I, I'm not exaggerating. This is where we are today. So is this the time. Yes. What about it. What about is it time to do reform on the estate tax. Well, if you believe in an estate tax, then of course we don't have one. And why do we have a step up in basis for income tax if we don't have an estate tax. And, and the estate tax never brought in a ton of money. It's more of a question of, do you believe in eliminating or, or deferring the aristocracy of the rich. And I really believe that you look at we have the Koch brothers and 50 other examples of people who might as well be princes and dupes, because they control the king. And, and yes, I think so but I it's a different philosophical question. You need to have an income tax because you got to pay for roads look at the messes. I just drove down from New York to Maryland. If the damn roads are being refurbished because of deferred maintenance this this bill that they have now. So there's road work every there's all kinds of stuff that's just messed up in this eastern car. I just drove 250 miles. And it's all over the country so should, should the rich not have to put in more when they have the capital, or should we all just live in a society where we've got how many people sleeping in the streets. How many people can afford to buy a house roads and bridges falling down there was a bridge I don't remember was in DC or New York I think was in New York. They had to close it because it was so in such bad repair they're afraid it was going to collapse. I mean, this is the United States of America. Yeah, and well remember what happened in Italy bridge did collapse. What happened has happened here. But let me let me ask you this so so right now we have two infrastructure bills, you know, one is the bipartisan bill or was it 1.2 trillion I think, and the other and the other is the reconciliation bill, which also has a lot of three and a half, three and a half three three point three point five three point five trillion. Okay. Yeah. And President keeps on saying that we have a way to pay for this. We're going to we're going to tax the wealthy. We don't know offhand maybe you do, where the tax reform is, whether it's in the bipartisan bill or in the reconciliation bill it's in one of those two. And in order to pay for an improvement of the roads in the Northeast Carter what have you around the country. So many other points. And arguably, we need tax reform to do that. So my question to you is, are we going to get tax reform to do that, or are we going to wind up not getting tax reform somehow and all this, you know, daily conversation tug of war about the infrastructure and wind up having either a failed infrastructure be some new infrastructure but not other new infrastructure and see no system to pay for it, leaving us with a, you know, significantly larger national debt. Yes. Yes. Well, the truth as we all know it is, our Congress has been dysfunctional for 25 or 30 years. We can't make decisions. And when you when all your, your effort is is devoted to making the other side look bad. It's impossible to come up with sensible legislation. And will we get there. I don't even understand what the what the Republicans want, except to make Biden look bad. And they know there's a need for this infrastructure when they're in control when they have the presidency they're not worried about the debt. We increase the debt, incredibly during the Trump administration, and nobody was worried about we take Cheney, when he was working for George Bush as the vice president, he said deficits don't mean anything. Well, what are we talking about. I don't know the question is, will our dysfunctional government become somewhat functional. Will we become reasonable at all. And, frankly, we're in a place where half the country thinks that the Republican idea of governance is okay. And they think that I believe for two reasons one, the economics are too complicated. But they know one thing the South and the Midwest know they don't like big city northern Democrats. You know for all these reasons, Donald Trump will poke you poke them in the eye on their behalf while he's feeling out of their wallet of course. And, and the second thing is, they have distorted the Republicans have distorted the process so that abortion and, and, and white supremacy become more important than the substance of running the government. And that's just where we are. So I give Biden a lot of credit for bringing these bills up they're necessary they were necessary during a Trump administration. They were necessary for a long time. It's like deferred maintenance on your house. Where does the money come to pay for it well we've already seen that we have skewed our capitalist system, so that the owners of businesses and the owners of real estate have most of the money. If it doesn't come from them. It cannot come from the guy who was just barely making ends meet in Hawaii how many people work two or three jobs, or the husband and wife work to a three just to make ends meet so we can see it we can talk about it, but somehow we're either going to get it done, or we're going to continue with failed infrastructure and more people sleeping in the street. Okay, it gets to your philosophy of, what does it mean government of the people by the people for the people. Does that mean you can carry guns, and you don't have to take an injection for, or whatever does that mean individual freedom, or I think that the majority of people should have a decent life should come together the government should be for the people and of the people, and, and not the enemy of the people, which is how they've been painted by the Republicans and I don't mind being as, as, you know, one sided as I look I represented every large company in Hawaii, and every large many many the largest companies in the world in China and Japan, and I don't have anything against them. They, they're a lot of great people they're all doing their job. They don't have to pay any more tax I didn't allow them to pay any more tax and they own. It's the governments and it's the pressure from these big companies that won't raise the taxes that we need to support an environment to support a society that allows people to move up in the system. This is what I learned as a kid and you learned, and we all had an idea that that's what the United States stood for an ability to work hard and move up. And we've, we've, we've lost it. And if we let it get worse, it'll get worse. Well, that's my question here. You know, you're describing a, you know, a decline in general on tax policy over several decades and generations. You're describing a decline in the quality of life of most Americans, maybe 99% really in our lifetimes in in recent years. You know, I think, I think we agree that the chances that the government will be able to address this properly, make good tax policy make good tax reform. In order to, you know, balance this thing so people in general will have a better life and the next generation will be as good or better off than the current generation. I'm optimistic about that from what we know today, but drawing on the lessons of history, Roger, what happens when a country keeps declining in terms of tax policy, tax reform, the distribution of wealth and property. What happens, what do we know about that. Well, we know, we know from the depression from the Great Depression, the system collapses. And then all of a sudden, what Franklin Roosevelt who was called a traitor to his class discovered or believed, we're going to have a revolution. We're going to have a revolt by the, the, you know, like the, I don't want to say communist but something like that where people say, What am I doing I can't even afford that to raise my kids I can't. Nothing is working. And, and so that's what history shows becomes the problem, or you become a third world country, where people why do people come to the United States we're having all this immigration issues, because other countries are much worse. You have no opportunity here you have some left some opportunity. Maybe you can't buy a house anymore. But at least you can have a car, and you can have a job, and you can have food on the table, if you work your butt off to do it. And Jay, I want to say one other thing that I think is really important. And I know a lot of my old clients will not be happy to hear this. I believe that the federal government is so bollocks stuff. The chances of them coming up with sensible ways to do this that people is very, very small. And even if it happens now. Look, they're talking about Republicans taken over the House and the Senate in 2022. So, so, I mean, I don't know it, but I do know this. We live in a beautiful place with a lot of dedicated people who work hard, who have a good consciousness who believe in the concept of aloha. We could take our own state. It reminds me of years ago in the 60s, when they talked about states rights meant segregation by the South. Now, I think states rights mean, you got to make your own economics, you got to make your own way. Hawaii needs to look for its own way, not to depend on the federal government. If the tax rate in in the federal came down by 20% 35 what would it come down from during the Bush, I mean the Trump and before that. Well, we were not getting as much money from the federal government. So, isn't it fair for us to raise our rates I know we already raised them to 11%. Maybe we have to go higher. And not only that, and this is something that could be really controversial, but I don't think it's fair that the value of hotels are 700 million a billion dollars, and none of the people that work for them can make a living without looking for them. I mean, none of them but that most of them. What is it we're doing, why do we give our precious land. Right at the ocean, the ocean land, you know, up to the vegetation line is all public property. Why is that access given freely to a hotel that built their hotel there, so they can pay less than a minimum wage. One of the things I think to talk about taxes locally is you create something like a wealth tax or value tax on hotels. And you make it very significant so that we can get enough money to carry our resources, but you then give them a credit, if they will pay a livable wage to employees. You have to set it up in a certain way that you can't scam the system. And that's not that simple, but it can be done, I believe. And what about it. You know the hotels, they can't take their business and run away. Other people can car manufacturers in Detroit have left for other countries, but nobody's picking up their hotel and moving on. And what happens, the value of a hotel is based on a capitalization of its earnings. So if you raised everybody's pay to $25 an hour. So they could live the earnings of the hotel would go down, it wouldn't be eliminate. It would go down. And the value of the hotel will go down. Well, you know what, the value of the hotel in the last two or three decades has gone out of sight. It's gone up so much higher than wages. It's ridiculous, partly bid up by the Japanese in the 70s, partly by raising of rates on customers. Now, if you go too far, and you push people past their mortgages, and now you may collapse the system or bankrupt it or whatever. So there's an issue there. But on the other hand, somebody's going to want to buy those hotels because they're beautiful. And if they're not worth a billion, let somebody buy it for 500 million and run it. Because one thing I learned in school and college risk versus return. The reason you make money in the capital market. The reason you make money in real estate is because you've taken a big risk. Well, one of the risks is that the guy before you, you ended up being the greater full. Did you ever get the greater full theory. When it was worth 300 million, you sold it to the guy for 500 million now he sells it for 800 he's taken out 80% mortgages and all that. There's no risk in that business. And the risk is nobody can live in except the guys that own the hotel so I just, you know, I'm looking at it, and I'm thinking, who's in charge here. What I'm talking about is really, really touches me. It resonates everything I know. We need the money in the state for our own infrastructure for our social safety net. We have to find ways to raise it. There's no final way really all things considered especially if you were the failure of the federal government to do a meaningful tax reform, but I asked you this question my last question today. What is the likelihood in our, in our system of government here in Hawaii na that these kinds of reforms could be adopted and implemented. Well, I'll give you an example of the real estate investment trust bill that we were trying real estate investment trust a zero income taxes in Hawaii, and our calculation is they should be paying 60 million. We looked it out and the legislature passed it unanimously, and Governor eg a vetoed it because for some reason, he thought it wouldn't bring capital here. Why do we want to bring capital here that doesn't contribute any tax money to the community. You know, I'm not saying that we don't need jobs. I'm not saying that we don't need hotels. I'm just saying that we're getting killed by that industry because we're scared to death of them. You know, I wish I knew Jay. There's a million people in Honolulu. Why aren't they voting for people who want to see significant change. Why do we have politicians who don't understand anything. It's because it's complicated. And it's not and everybody wants things to be simple. And you cannot do it back and you know George Arioshi, who was a governor for what four terms. He created a whole plan for the island of a wahoo that's held up pretty good today. And he had it and I believe George had it in his mind to do what was best for the community. And I don't think that people are necessarily evil. I just think they don't understand how we've got where we are today. We've got the same system. We're still capitalist. I'm not talking about changing the system. I'm talking about how did the system get itself so out of whack. That you cannot earn a living in Honolulu, which is such a desirable place to live, which is such a desirable place to visit. Why can't we get there? Can we get there? Yes, we can get there. You talk to people like Gary. You know, our friend Gary and Kawai. Gary Hoosier. Gary Hoosier. He will tell you the way to get there. And other people and Gavin Thornton at Appleseed, they'll tell you the way to get there. We can get there. A face is another. There's a lot of community sources. But I think the kupuna have to step up. People like you and I have to step up and more of us to say, okay, we're the elders. We're going to try to come up with ways so that our community can live. Recently. We're out of time, Roger. We'll have to, we'll have to leave it there. Roger Epstein tax attorney and philosopher. And really brilliant suggestions today. This was a really special discussion. Thank you so much, Roger. I look forward to our next show together. Thank you, Jay. You're doing a terrific job for the community and I really appreciate it. And, and you and I may be a little ahead of the curve. Maybe we'll get there in three to five years. Let's keep plugging away. Not good. Oh, yeah.