You will start to see the tax cut reflected in your paycheck in February.
One of the controversial aspects of the tax cut is that the deduction for state taxes paid is now limited to $10,000. Although wealthy taxpayers will see a reduction in their marginal tax rates, that reduction will be offset somewhat by not being able to fully deduct property and income taxes to the states. Fortunately, in North Carolina, then Gov. Pat McCrory signed legislation that reduced the top rate from 7.75 percent to the current rate of 5.75 percent, greatly reducing the impact of this deduction limit for North Carolinians. The states that are howling the most, such as California, New York, and New Jersey, are among the highest taxed states in the country.
You might think the Californians might simply prefer to pay higher taxes and receive more services from the state. Unfortunately, a substantial number of people don’t prefer that so they simply move out of the state. The states with the largest outflow of people are high-tax states such as Illinois, California, and New York. Guess where many of them are moving: North Carolina.
But, what is bad about being a high-tax state? There are two primary problems that most Americans aren’t aware of. First, the higher percentage of the economy that is delivered through government service, the higher the rate of income inequality. When government makes decisions about allocating money, that allocation no longer happens in a free market. In that situation, it pays to have friends in government, which the rich have, but you and I don’t. Secondly, a larger government sector requires businesses to be large to have staff to deal with all of the government requirements. This means that it will be difficult to start businesses and to stay afloat as a small business in a large-government state.
Both of these are true, and even more dramatically at the federal level. The more government controls parts of the economy, the greater income inequality will be. This is why to President Obama’s dismay, income inequality increased greatly during his administration, even though he desperately preferred otherwise. It is also why we have an extremely small percentage of business startups that our country once had.
Although the high-tax states may be howling, the tax reform bill passed will have an overall positive impact even for them. I hope you are reading about all of the amazing announcements that were made just within days of the tax law taking effect. My favorite is Apple’s decision to bring into taxation over $200 billion. In August, Apple CEO Tim Cook said that Apple would not bring these billions back into the United States until a fair tax rate was in place. Now one is.
Most people think a government will get far more tax revenue from a 36 percent rate than a 21 percent rate. In actuality, it isn’t true. If people and companies can legally avoid taxation, they will go to great lengths to do so. If Apple had to keep $200 billion outside the United States, where do you think they are more likely to invest it to create jobs — outside the United States. Now all of that money will return home, and Apple has already committed to invest more than $350 billion here in the United States. Workers are getting raises and/or bonuses, companies are creating jobs, African-American unemployment is at the lowest rate ever recorded, and corporate charitable contributions are increasing.
All of this bodes well for America.
Eric Dent, a former professor at The University of North Carolina at Pembroke, now teaches at Florida Gulf Coast University.