 is Think Tech Hawaii. Community Matters here. Welcome back to Community Matters. I'm Jay Feidell. Here we are on a given Tuesday. We're in touch with Roger Epstein. He's in Washington, D.C. We have him on the phone with Skype. We want to talk to him about tax reform, especially estate tax reform. We are so happy that he's able to join us. Welcome to the show, Roger. Thanks, Jay. It's always a pleasure to be with you. Always a pleasure. The same here, Roger. So I don't know if you're in Washington watching over the government or not, but let's talk about the government. Yeah, they're watching me. I'm watching them. We're, you know, it's kind of a mutual thing. I think they're watching everybody these days. Oh, yeah. Yeah, they're watching us. They know what they want. Yeah, don't forget they're attributive. Don't forget that. Anyway, so we have this talk about tax reform, and I consider the word reform euphemistic because it's not really reform at all. Have you got to handle, and you're a tax lawyer many, many years, decades, do you have a handle on what's going on with this quote, tax reform bill? Well, yes, I have. I've looked at it quite a bit. Yeah, I've been a tax lawyer for 50 years. Oh my God. I started when I was five years old. Thank you, Roger. Yeah. So I was five years with the Internal Revenue Service. I started out auditing tax returns and then worked at the National Office of IRS. And then I was a tax lawyer at the Cade Shetty law firm for about 45 years. Fabulous. Okay, we're in good territory here now. We're in a perfect foundation for this discussion. I got a lot of history with the tax law and looking at different tax laws. Yeah. And this one is really fascinating. Well, what makes it fascinating for you? Well, just sort of, it almost reminds me of the way they explain it as a kind of a hidden ball trick, you know, where you say one thing, but you got to watch the other hand because it's really doing a lot more than the hidden ball trick. So they tell you that there's four reasons that they want to have this bill. Okay. And one of them is to, the first reason is to stimulate the economy. And I saw the president on a show being interviewed by Mike Huckabee. And he was saying, when we get this tax bill, the economy's going to go through the roof. And I thought, you know what, the economy to go through the roof, the economy's doing really nicely now. If the economy goes through the roof, interest rates have to go up to fight inflation. We get inflation. You really don't know what you're taking on. And not only is there a big risk, it's just sort of against economics 101, but you give a massive stimulation of $1.5 trillion to the economy when it's just recovered from the biggest recession that we've had since 1920s, 1930s, 1929. So that seems where you start. Why do we want to give a huge input? Why do we want to stimulate an economy that's clipping along nicely? Well, there's another question inherent in that is, okay, you're going to give this huge tax break. That's nice. But we have lots of expenses to pay. And clearly, can we afford that? I thought Republicans were on the constraint side, but apparently not. Well, I think the Republican concept has been for many years now. We need to do two things. We need to decrease the expending across the country, and we need to lower taxes. And so you've got to do both of those at the same time, unless you want to increase the deficit by this huge $1.5 trillion that the office of the budget says is what it's going to cost. So what they've talked about for years is, well, let's cut the taxes and it will starve the expenses. If we don't have the money, we won't be able to pay for things. And so the expenses will come down. So it seems unconservative to me. It seems extremely risky to do it that way. But that has been a discussion in Republican philosophy, and it seems to be one of the methodologies in this bill. Well, but we have new bills to pay. We have all the infrastructure that President Setti was going to install. We have much more money on the military, billions and billions and billions on the military. If we're cutting our income, how can we pay those things? Yeah. Well, let me suggest one thing here. One of the provisions that lowers the taxes here is the reduction of the corporate tax rate from 35% to 15% to 20%. Originally it was 15, now it may be 20, but that's a discussion. You bring it down by 15% to 20% of all the corporate income. Okay. I have heard for many years now from senior people in the Treasury, not in this administration, but in past years, that if you want to reduce the corporate tax rate to 15% or 20%, you have to couple that with a value added tax. Now, the value added tax is essentially a national sales tax. And one of the reasons that the Republicans give you for wanting to lower the tax rates for corporations is that we have one of the highest rates in the world, which is true. But it's also true that those countries that have lower tax rates on corporate income have a value added tax. The value added tax is essentially a sales tax that is paid at every level of the value of services and goods. So if I'm a manufacturer and I spend a dollar, I add 10 cents of tax when I give it to a distributor who then resells it for $2, including the 10% tax, and then there's 20% there. And by the time it gets to the customer, there's a built-in 50-cent tax on a $5 item, just as an example. So why do you need to do that if you reduce the corporate tax rate? Why do you need to have a VAT? Just because of what you said, you still got to pay the bills. Okay. So this has been something I've seen for years, which is you cannot really have a lowering of the corporate rate that significantly without coupling it with a value added tax. So my sense is that that would be the next shoe to drop later on. Well, the value added tax is regressive, isn't it? Yes. And that's another thing that this bill is very focused on. The progress of tax is what we've always had in our income taxes and our estate taxes since 1913, when we had to pass a constitutional amendment to have an income tax. And the estate tax was in 1916. So it was always a progressive tax, meaning that those making a higher income paid more tax. And the reason for that you might say is a concept called discretionary income. So in today's world, if you make $50,000, let's say, you got to spend all your income just to make ends meet. So if you have a, let's say we had it across the board, 20% tax. Now I'm making $50,000 a year, my 20% cost me $10,000. A guy making a million dollars, his 20% costs him $200,000. So it's kind of a simple approach to say, well, that's fair, everybody's paying 20%. The problem is, and this is why we have graduated progressive rates, the $10,000 from the 50,000 guy leaves him with $40,000 to meet all his obligations. The million dollar guy, yeah, he paid 200,000, but he still has $800,000. And so if his needs are 200,000, he's got discretionary income of 600,000 remaining. Whereas the guy on the margin at $50,000, he doesn't know where that ends meet now. So one of the other purposes of this bill is to simplify the tax law. And they've reduced the rates for individuals, and that will be a simplification. And they also will eliminate some people from paying any taxes because they're the way they've changed the rates. But I'll give you an example. Here's the way it plays out. If you made, I wish we had something to write on, if you made 18, there's four categories. If you make $18,000 a year, you pay no tax now, and you won't pay any tax under the new bill. If you make $50,000, you will pay $116 less under the new bill. If you make $160,000, you will save $607 under the bill. If you make $500,000, you will save $7,100 under the bill. So if you take those numbers, everybody saves something, $50,000 is 10% of $500,000. So in other words, the guy making $500,000 makes 10 times what the guy making $50,000 makes. With the numbers I just gave you, the guy making $500,000 saves 70 times what the guy making $50,000 saves. So the 500,000 guy is making 10 times more, but he's saving 70 times more. So is this what they're talking about when they say that this bill is going to benefit the rich a lot more than the poor? Is this example, these changes in rates, is that what we're talking about? Roger, I suspect that the public really doesn't understand how this works. No, it's so complicated. And they're back and forth. And that's why I try to give you these simple numbers. For an individual, the corporate tax rate is going to come down. So we're going to lose all that revenue. But for an individual, there were four purposes for this bill. One was simplification. One was to give a cut to the middle class. The first one was to stimulate the economy. We've already said economy doesn't need to be stimulated. In fact, it's a huge risk when you stimulate the economy that we might go through the ceiling with inflation. Everybody gets hurt, interest rates go up. You just don't know, but that's what usually happens. I've never in my 50 years of tax practice seen the government try to stimulate the economy when it's doing well. You stimulate the economy in 2008 when we were in a hole. Then you're going to simplify. Then it's a middle class cut. It's supposed to be a cut for the middle class. And this will stimulate more spending. What you see that what happens is most of the savings, seven times the savings of the 50,000 guide for the rich, and for the guy making 160,000, the rich are still making three times, saving three times what he's saving. So it's a deception. It's what I started out saying. You say, oh, this is a reduction for the middle class, and a lot of people don't have to file tax returns. But for the guy at the top, he's taken it out with a shovel. And so, so here, okay, they're going to get down to three rate cuts, three rates. It has been the lowest rate was 10%. They're going to make that 12%. So somebody's going to pay a little more because it's 2% higher there. Then they're going to have a 25 or a 28% rate. And then the highest rate was 39.5, which didn't kick in until you make $420,000, something like that. Okay, they're going to reduce that to 35%. Why not just knock that piece off? The rich guys already get the benefit from the lower rate. So they get the benefit from the first cut, they get the benefit from the second cut. And now we're giving them exclusively the benefit from the next cut. You see, they're not just paying at that top rate, that's only on income at a higher rate. So the benefit to a guy making 50,000 and 160,000, that all goes to the guy making 500,000 and a million also. But now he is one that only goes to him. Who's pushing for this? Is it a consortium of rich people? I mean, who's actually calling for this? Why is this happening? Well, this is what the Republicans have always wanted. And this is something Trump promised to give people. Now, why the people that many of the people who are unemployed, why they voted for Bush so he could give them this? Okay, our country has now 3%, 4% unemployment in most cities. We're earning, our economy is growing at 2% or 3%, which is considered a really nice plug-along. There are pockets in the country that are really dying, coal miners in West Virginia. Why not target a tax cut or some other kind of stimulation for those people, rather than across the board tax cut, which, as I just pointed out, dramatically gives, it gives seven times the benefit from a 50,000 a year earner and three times the benefit to $160,000 or goes to people making over $500,000. Roger, do you think this is going to pass? You know, I don't think it will. I don't really know, but I think what's the problem is there are some, there are some people in the country, in the Congress who are Republicans, who really are conservative. This is the least conservative thing you could do. The economy is doing well. We take a risk of $1.5 trillion deficit. Now, they say we're going to make up for this deficit because people are going to have more money to spend, and that's going to stimulate things, and that's going to grow more revenue. And in fact, we're going to have, we're going to have excess revenue instead of a deficit. Yeah. But that could backfire. Huge risk to take. Well, I hope, I hope to backfire. Why would you take that risk at this time? Okay, let me get to your question, Jay. Is it going to pass? Now, some of the Republicans say, we can't increase the deficit. So we got to find ways to pay for this. Now, they've been looking at things like eliminating the deduction for state and local taxes. And the problem with that is it hurts the states. The states get a benefit because their individuals get a deduction in their federal taxes. And so the state taxes don't hurt so much because the federal government pays 25 to 40% by reducing your federal taxes. There's an irony there. I mean, this administration wants the states to handle more of the burden of government, spend more state money, and yet, and yet it's not, it pretends not to allow deduction for state taxes. Roger, we got to take a short break. We take a break. And when we come back, I want to continue this and get your hand on a handle on where, you know, where it's going. But also, I'd like to talk about accumulation of wealth. I'd like to talk about the estate tax and whether this bill will affect that. This is Roger Epstein. He's in Washington. We have him by Skype. He's a tax attorney for nearly 200 years. And we're going to have further discussion about the tax reform bill in Washington right after this break. This is Think Tech Hawaii, raising public awareness. Ted Rawson here, folks, you're a host on Where the Drone Leads, our weekly show at noon on Thursdays here on Think Deck, where we talk about drones, anything to do about drones, drones, remotely piloted aircraft, unmanned aircraft, whatever you want to call them, emerging into Hawaii's economy, educational framework, and our public life. We talk about things associated with the use, the misuse, technology, engineering, legislation with local experts, as well as people from across the country. Please join us noon on Thursdays and catch the latest on what's taking place in the world of drones that might affect you. Okay, we're back. We're live. We're having so much fun with Roger Epstein. He's in Washington. He joins us by Skype. We're talking about the tax reform act, which is a euphemism, and what its provisions are as far as we know, although it's kaleidoscopic in terms of change, and what its probability of passage is. And I guess the last thing we heard from Roger is it might not pass, and wouldn't that be a blessing because we really don't need it? We don't need it, do we, Roger? I don't think we need it, Jay, and I think it's going to hurt us dramatically if we get it. And you started to talk about at the end. Let me just finish. What they're trying to do is find a way to pay something for this. So they looked at the itemized deductions. The last thing they talked about was the state taxes, eliminate that as a deduction for federal. They talked about getting rid of the home mortgage, and the real estate industry went ballistic. And they talked about getting rid of charitable contributions. And I'm proficient in this charity. So now they're struggling to find any way to pay for it. And there are a lot of people in Congress on the Republican side who say, we can't increase the deficit. And so the only way this can pay for itself is if it does somehow stimulate the economy so much and think about what happens if interest rates go up, if there's inflation. I mean, we could be putting ourselves in another depression when in fact we're kicking along real nicely at the moment. So I would hope we would get beyond that the Republicans have promised a tax cut for years and there'd be a few who say we just can't do this, but we don't know. So if you want, let's turn to the estate and gift tax. Yes, please. I want to talk about accumulation of wealth. Accumulation of wealth and the idea that graduated tax rates for income tax and a state tax, the death tax for transfers of wealth among the very wealthy. So just to let you know, just so people will understand, this is not a new concept. Our fundamental system of taxation for income tax and a state tax came in in 1913 when we had a constitutional amendment to allow these kind of taxes. And 1916, when Teddy Roosevelt was the president, and Teddy Roosevelt was one of the first progressives. And he believed in equality of citizens and against the accumulation of wealth because his fear was that we were going to have a plutocracy, a government where the rich dominated everything. You could argue we're pretty damn close. Yeah, I would argue that. But that's what he was afraid of. You know, the country was only 100 years old or so. And there'd been kings and queens. There still were kings and queens in many other countries. And the founders of the United States didn't want to see that happen. And they didn't want to have the nobles running the place, you know, the aristocracy of the rich. So the income tax was designed for just what I talked about before. If you have more discretionary income, you can pay a higher tax. And the guy at the bottom can have a decent living. So we've gotten to a point in our country now where we have this 1%, 99% and 1% of the population controls like 50% of the wealth. It's totally different than when you and I got out of college even. Yes, that's the interesting thing. In our lifetimes, it's changed so dramatically. And now it's polarized that way. Yes. And I don't understand, frankly, except because of this shabai, you know, this watch this hand, and I'll do something with the other, that people can want to support this when they're in the lower brackets. When they're making, just trying to make ends meet and unemployed, why do they want to give more to the rich? Now, the wealth tax in this bill, the estate tax, the death tax is completely eliminated. It has nothing to do with, well, you could say it simplifies the code, you could eliminate the tax altogether, the income tax, I would simplify the code. So they've eliminated the wealth tax. And obviously that's not going to stimulate the economy because it's only tax when you die. And so it doesn't help the middle class because you don't even pay the tax unless you and your spouse together have almost $11 million. Right now or then. Which is just a very small portion of the population. So what is the estate tax like right now, Roger? The what? What is the estate tax like right now? Right now, you don't have to pay unless you have $11 million of assets. And if you have more than that, you pay 40% of the excess over $11 million. It's quite a significant. It was nowhere. The exemption was nowhere close to that when we were in school. Oh, no. A lot of people that were new had to pay a estate tax. When I first started with the government in 1967, it was a tax on everything over $60,000. Wow. And then it was about $200,000, got up to about $500,000. And then when George Bush became president, he changed it so that it started getting really high. And it went to a million. You didn't pay any tax unless you had a million. Then it went to two, then three and a half. And then the last year was five. Now, interestingly, it was so it cost so much to read to undo the estate to let you know, change those numbers that in order to get that pass, they had to say at the end of 10 years, it went back to, I think it went back to a million. Okay. So those numbers I gave you for each person. So you got to double them for the household, for a husband and wife. So in the 10th year, it was $5 million. And Obama was the president. And if he didn't do anything, it would have gone down to a million each would have made it a $2 million base. And it would still have covered a lot of people in this country. Yes. But for some reason, I will never understand Obama set the amount at $5 million. He let it go on. And it goes up in inflation. So now we're at $5,450,000 for each person or just about $11 million. So the Democrats cannot argue that, you know, they they tried to save this thing. It was really Obama's doing. If he had done nothing, it would have gone to a million and there wouldn't have been anything the Republicans could do. But now what happens is it's so high, you can make the argument that for a lousy $50 billion or something, we might as well just get rid of it. Yeah, get rid of it. So my question to you, we only have a minute left. My question to you is in the long term, looking at it sort of in a macro economic way in a social policy kind of way, that allows the rich people who are benefiting ostensibly by the rest of this bill, the income tax side of this bill, and who and who there are many, many, you know, there are more people who are not rich and fewer people who are much richer now after our lifetimes on the planet. If we let them accumulate wealth without any death tax at all, what happens to our society? Would you get a venture of thought on that? Well, I think we're moving in that direction, Jay. It's just what we talked about and with very little and move up in the chain. Who can buy a house in Hawaii now? That's going to be exacerbated. I think this is a poorly designed bill. It's a sham. It's going to give more to the rich, little to the middle class, and it's going to risk a huge deficit and a depression for our country. That's how seriously bad I think it is. My own personal opinion, 50 years practice and tax law representing the biggest corporations and the wealthiest families in Hawaii, maybe some in the country, I think this is a, it's a mistake. And if we do it, we're going to exacerbate the 1% and the 99%. And we're going to risk a depression, and why we would want to do it is beyond me. Well, Roger, thank you so much. I mean, it's not that you make me feel good, but you at least make me feel aware of a tremendous risk. And I sure hope that bill fails. We'll be watching, we'll be talking to you again about how it goes. Thank you so much for joining us for this discussion and sharing these thoughts. I hope Mr. Trump watches this video. I hope he does too, Jay. And I want to thank you. It's a, it's always a pleasure to talk intelligently with you. And I want to thank you for keeping this think tech going and having it grow. It's a wonderful thing for Hawaii and let's spread it to the rest of the country. Thank you, Roger. Aloha. We'll see you soon. Aloha.