I should be a Trump supporter.
I was on a Skype chat with Jim “The GodFather” Collins a few weeks ago when I half-jokingly said this, and JLCollins responded with an incredulous “Excuse me?”
“Okay, I’m actually not,” I replied sheepishly. “But on paper, I should be. Every policy he’s actually signed into law (i.e. the ONLY one) made early retirees like us richer. ”
JLCollins laughed. “OK, why don’t you write that into an article and post it in your blog. I’m sure your readers will get a KICK out of you saying that.”
So I did.
Here’s why the Trump tax cuts make early retirees like us richer.
The Tax Cuts Help the Wealthy
This is what the Trump Tax Cuts look like for taxpayers.
|Income Tax Rate||Income Levels for Those Filing As:|
On the surface, it seems to sprinkle a 2-3% reduction across many tax brackets, but as with any tax cut structured this way it inordinately helps higher earning people. This is because people earning more will benefit from the tax reductions in their bracket PLUS all the brackets below them.
In fact, according to the NY times tax-cut calculator, a married couple earning $25k will get a tax cut worth precisely $0. Yet a married couple earning $750k will get $32,240. And since most people doing this whole FIRE thing tend to make a lot of money while working, this tax cut directly benefits them.
So will YOU benefit from the Trump tax cut? Maybe. The standard deduction gets doubled to $12k per person. But it eliminates the personal deduction you get per child. And it limits the amount of mortgage interest you can deduct to $750k. And it limits the amount of state and local taxes (like property taxes) you can deduct to $10k.
So at lower income levels and depending on what personal deductions that you were using that have now been eliminated, it’s possible that your tax bill may actually go up. According to the NY times, approximately 75% Americans will have their personal taxes reduced by this tax bill.
And what about health care, you might ask? The Trump tax cuts eliminate the individual mandate clause of Obamacare, which was designed to induce people into buying health insurance. Without that mandate, health insurance costs will go up since healthy people would likely skip buying insurance until they actually need it.
That being said, while this will make premiums go up, it doesn’t eliminate the government’s role in subsidizing the cost of those health care premiums. He tried to eliminate those subsidies, but he failed. Repeatedly.
So now we’re in a strange situation where health care premiums will rise, but government subsidies will also rise accordingly.
Why is this good for early retirees? When you’re working your health care will likely be covered by your employer, so changes to Obamacare don’t directly affect you. But when you retire, your income drops to effectively 0, meaning you qualify for federal subsidies to pay for health insurance. So even though those premiums might rise because of this bill, your out-of-pocket costs won’t.
Tax cuts REALLY favor corporations
Now where the tax cuts REALLY change the game is how it affects corporations. The big headline-grabbing bullet point is that this tax cut slashes the corporate tax rate from 35% to 21%. This is a huge change because a tax reduction that large immediately improves the profitability of a company, all else being equal. And because stock prices are determined (in part) as a multiple of a company’s earnings per share, this directly boosts the stock price. In fact, this stock market rally that has lasted since Trump’s election was driven largely in part by anticipation that this corporate tax cut would get passed.
The second, less understood seismic shift in corporate taxes is changing corporate taxation from a worldwide tax system to a territorial tax system. Most countries only tax earnings that are made inside that country. This is a territorial tax system. The US (and, apparently, Eritrea for some reason) taxes corporations on their income no matter where it’s earned, but only charge that tax when the money re-enters the US, a process called repatriation.
This causes multinational companies who earn their profits overseas to leave their money parked outside the country. And I know this because the company I used to work at ran into this exact problem. We designed our chips in the US, but actually manufactured them in Taiwan, then sold them to electronics manufacturers all over the world.
Many of those devices would then get sold to end consumers back in the US, but because we didn’t sell to end-consumers directly, we would be sitting in an odd situation where we were at the same time cash-strapped yet had all this overseas cash sitting there that we couldn’t touch. Other companies in Silicon Valley like Apple and Amazon also had this problem, which is why Tim Cook was seen personally lobbying Trump for this to be addressed.
This tax bill fixes the issue, and also includes a way to repatriate money already held overseas at a one-time low tax rate.
Publicly, Republicans have been crowing that this will be a huge benefit to average workers in the form of fatter bonuses, higher wages, and a hiring spree. And to be fair, a small number of companies did choose to share their tax savings with their workers.
According to the White House’s own compilation and more recent announcements, only 18 companies in the S&P 500 have responded to the tax overhaul by raising wages, handing out bonuses or improving employee benefits.
But a far more likely outcome will be companies choosing to use that extra cash to return money back to their shareholders, since CEOs and high-level executives typically own a lot of stock in their own company.
The two primary ways of doing this are stock buybacks, and dividends. Stock buybacks are when a company buys its own stock in the open market. This reduces the amount of shares available to trade, which increases the stock price since earnings per share suddenly shot up. And the second way is to pay dividends, in which an amount of money is simply paid out to every shareholder.
A truism of capitalism goes that when rich CEOs are faced with a choice between giving more money to workers and giving more money to themselves, the choice is usually pretty easy.
The president has held fast to his pledge even as top executives’ comments have run counter to it for months. Instead of hiring more workers or raising their pay, many companies say they’ll first increase dividends or buy back their own shares.
Trump voters THINK they benefit…
The sad/funny part of all of this is that this tax cut has gotten rave reviews from his supporters, despite the fact that most of them are poor working-class out-of-work white people. An income tax cut doesn’t help you if you don’t have an income, and a rising stock market doesn’t help you if you don’t own any stock.
But in reality, it’s Early Retirees like us
The reality is the biggest beneficiaries of this tax cut are early retirees like us. The stock market has roared ahead since this Trump guy took power, and our personal net worth went up by over $100k in 2017. And other FI bloggers who had a more equity-heavy portfolio are sitting on even higher gains.
Trump knows this too. Despite the fact that he sold this tax cut by saying that rich people like himself wouldn’t personally benefit, he was recorded during the holidays at Mar-A-Lago bragging about how they all “just got a lot richer.”
President Trump kicked off his holiday weekend at Mar-a-Lago Friday night at a dinner where he told friends, “You all just got a lot richer,” referencing the sweeping tax overhaul he.
And he’s right. So thank you President Trump for making millionaires like us who don’t need the money “a whole lot richer.”
And as for the people who actually voted for him?