How to Use Hard Trends to Predict Tax Reform Before it Comes
You and I are busy making predictions and judgments about the future.
Around this time of year, I am frequently engaged in predicting who will win certain college football games. Many of my friends and I enjoy watching ESPN’s Lee Corso pick the top game of the week by donning the headgear of the school’s mascot of his choosing. (As of the writing of this post, I am glad to announce he picked against my alma mater recently, and was wrong. Thanks, Coach!)
It doesn’t stop there. People pick investments, career paths, types of automobiles, and other life choices based on how they think things will be in the future. We make decisions in the face of uncertainty every day.
The House and President just released their proposed framework for the coming tax reform push. I believe the framework is signaling a coming change and verifies a belief I have held for a while now by considering hard and soft trends.
Daniel Burrus explains in his genius book, Flash Foresight, we can reasonably predict future matters by observing what he labels hard trends. Hard trends, simply put, are things that are so obviously certain that you can count on them. They are not soft trends. Soft trends may or may not happen. (Note: Daniel Burrus has not commented on my predictions of income tax reform, I am simply deploying his tools in my own view.)
Burrus lists three gigantic hard trends you and I cannot run away from and can be used to reasonably predict future events: 1) Demographics, 2) Regulation, and 3) Technology.
The Baby Boomers at this moment are retiring in droves. Some are hanging on longer than others, but their age and season of life is a known trend. With this trend comes the overwhelming burden of Medicare and health care costs for these some 70 million individuals. This is an undeniable hard trend. The Gen X, my itty-bitty generation called the Oregon Trail Generation, and Millennials are right behind them. This is widely known. I simply want to draw attention of the massive onslaught of Medicare expenses on the horizon. Their healthcare is an unfunded, unlimited liability that will be funded through Regulation by these next generations and existing wealth transfer among Boomers.
You can bet every dime on this, and you need not be a scholar to know this is true. To offset this issue, some concentrated tax revenue, in addition to employment taxes, will be needed to fund the liability. By concentrated, I mean income that is less subject to deferral. There are many benefits to creating less deferral opportunity. Dr. Daniel Mitchell with the Heritage Foundation in his article, “Flat Tax is the Way of the Future”, explores many of these benefits.
The most recent framework seems to be leading us to a more flat income tax. More to come on this.
Next, government regulation is a hard trend. Though regulation is a hard trend, the direction of regulation is softer in my opinion. I know some folks say, “Every time Congress simplifies something, they just make it more complex.” Right, I rather agree. However, if we take an honest look at history, we do not see the absence of regulation or complexity, but we see the tides of over-regulation and deregulation. And these tides, or soft trends, are still subject to the hard trend that regulation will play a role in our lives and must be followed. In the instant case, the needs of the demographics mentioned above (Boomers, Medicare, etc.) will interact with regulation to make sure their needs are met. The United States Congress will use its power to transfer wealth through income taxes to meet their needs.
The coming liability (i.e., overwhelming needs) and the regulations (i.e., income tax laws created by Congress) written to fund the liability are undeniable hard trends.
Finally, technology is a hard trend and is the icing on the cake for my prediction on income tax reform. You need to read Burrus’ book to get this fully, because within technology there are several hard trends. For this post, I will point out only the undeniable fact that if a thing can be automated, it will be.
The current system of income tax allows for the taxation of various types of income and the deduction of certain expenses (think charitable gifts and mortgage interest, etc.). These vast, complex, and confusing rules were designed to incentivize good things (like giving to your neighbor, property ownership, and investment) while raising revenue for the government’s needs. Because of the vast complexity, judgement needed, limitations of information, and especially lags in reporting, our lives have been accustomed to earning income and then reporting it to the government via a form, ex ante.
But stop and think about this. Technology is no longer a limitation like it was when return forms were created to capture historical data. Now, it is an enabler of real time information. What if we could know in advance the types of income and deductions we incurred and just pay as we earned and no longer report after the fact, especially in a flatter more concentrated tax system? What if we just had it all real time and reported and paid real time? The technology is here to do this very thing.
The Conclusion of the Matter: Precision Withholding Will Replace Personal Income Tax Returns
When you take all three hard trends together, the need to raise massive funds through regulation for demographics is rather obvious and has been with us for a long time. The real drive behind my prediction is the wide availability of real-time technology plus the “telegraphed football pass of the framework” for more flattened income tax revenue.
I predict the destination may be something called precision withholding. Precision withholding allows you to declare income up front, pay as you go, and true up to the actual liability on a more real time basis. This also creates the need for better reporting of income from sources (wages, investments, etc.). Thus the big “true-up” or income tax return is no longer needed to accurately report and pay income tax. Going forward, with data known, taxpayers can sign into an app or a website and enter the full year’s picture and start withholding. Income changes? Easy! Just sign in and adjust as you go. The regulators will act in a similar path reconciling your income and tax as you go through reporting from your various (more simple) sources.
Observe, if you search online for tax reform, you are bound to run across something called the “post-card” tax form. The idea is that individual income tax should be so fair, flat, and simple the return fits on a post card. Paul Ryan has been pushing this in recent months. The post card return is an intermediate step on an already larger linear trend: the end of ax-ante individual filing. Technology will enable you and I to maintain some complexity in a flat tax environment, while still accurately paying as you go.
Do you think I’m crazy? Check out Japan and the United Kingdom. They are both highly developed nations with access to technology, well established hard trends in their demographics, and income tax regulations used to fund their social programs.
Both use a form of precision withholding quite successfully. Once source1 cites only 20% of Britain’s citizens have to file some document to “true-up” the year’s withholding. Obviously, simplification is possible, and it is working.
These hard trends and precision withholding are certainly correlated. I suppose causation is the point where I am inserting my prediction, and the framework hints at this being true.
I admit, I could be wrong, and much more work is needed to prove my point more convincingly. Of course, time will tell. But I have learned using undeniable hard trends is a great way to predict, and capitalize on, the future. If I am interpreting the hard trends correctly and wisely taking into account other soft trends, I predict the end of individual income tax returns is firmly fixed on the horizon. It will be replaced with precision withholding.
- A Fine Mess. A Global Quest For a Simpler, Fairer, And More Efficient Tax System, T.R. Reid, Penguin Press, New York 2017 p.220
Jeremy S. Weaver is a CPA and Financial Planner at PlanFIRST, Inc. in Greenville, SC. He has spent over 13 years in public accounting in large international accounting firms and is a frequent lecturer to university students. In his spare time, he is a husband, father, and loves to read on a wide range of topics including coming technological changes in finance and accounting.