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Keep on Dreaming

President Trump charges U.S. Congress with immigration reform, pushes for overhaul of tax system

By Christopher Karadjov, content editor, Business Connect magazine

To paraphrase liberally Benjamin Franklin’s famous dictum, two things are certain in the United States: immigrants and taxes. No other country in the world has been so prominently coveted by generations of newcomers hoping to cut out a piece of the American Dream for themselves. “We are all immigrants,” is a saying that is as land-o-Lincoln cliché as the apple pie.

On the other hand, the United States would also uncharacteristically of most other countries expect its citizens to pay taxes regardless of where in the world they may reside. A stated intention to relinquish your American passport, for instance, is likely to trigger an immediate and massive IRS audit, because it is assumed that the only ostensible purpose may be to stop writing annual checks to the Department of Treasury.

By long-established consensus, though, the U.S. immigration system and its taxation are considered overdue for massive overhauls, although the polar ends of the political spectrum will give you different reasons as to why.

Immigration system is broken mostly for the immense number of undocumented foreigners who are making their living in the United States, but also because of the frustrating process by which residency and citizenship can be acquired. The tax code, which runs to some 74,000 page and 10 million words, is incredibly convoluted; it also imposes too much of a tax burden on some categories of taxpayers, and caresses others, thus hindering the economy.

In August President Trump rescinded the Deferred Action for Childhood Arrivals program (DACA). Under this policy, adopted by his predecessor Barack Obama, young unauthorized immigrants were allowed to work and live freely in the United States. They received renewable two-year deferrals of deportation, if they covered certain criteria. DACA-recipients by definition were brought by their parents to the United States at an early age, way before they were able to make any legal decisions for themselves. Generally, they have gone through the educational system of their respective state and were unaware of their immigration status or lack thereof until taking up a job or applying for college admission that usually requires a valid Social Security number. Of course, no sane person can blame a child for whatever transgression his or her parent has committed, hence the broad sympathy for these young people as long as they remained law abiding. The estimates put DACA participants, colloquially known as “Dreamers” (as in “The American Dream”) at some 800,000, scattered in virtually every state. Some legislatures such as California’s has granted them special consideration by allowing “Dreamers” to pay the in-state college tuition (a difference of about $27,000 per year for the University of California system and about $6,000 for the California State University campuses).

These efforts notwithstanding, states inevitably have to yield to the federal government on immigration issues, so they only do that much without progress in Washington, DC. One possibility for reform is the so-called Dream Act, a bipartisan bill that would provide a path to citizenship for DACA recipients. Two Republican senators have also filed a bill known as the SUCCEED Act. It offers Dreamers a 15-year path to citizenship. In 2010 House Democrats voted on the Dream Act, but it failed to gain 60 votes in the Senate, and thus the reform was relegated to executive actions from the White House to the anger of the GOP. The main fear that the Republicans express have been related to the potential of sending the wrong signals by legalizing currently undocumented immigrants en masse, and thus attracting significantly more people from around the world counting on a future amnesty. Such concerns are understandable, but not inevitable. Unfortunately, President Trump has played up mostly the apprehension toward immigrants among his core supporters since his very first speech as a candidate in June 2015. He pays lip service to inclusion, yet generally prefers to stoke fear.

A few other legislative proposals have been suggested, too, but regardless of the particular approach, it will require serious negotiations, considerable compromises on both sides and eventually a bipartisan solution. It is clear that U.S. businesses are aligned in their support for changes in the immigration laws, because immigrants have been historically a significant engine of economic growth. Their potential is immense and should be used wisely, everyone agrees. The president and the Congress should be reminded daily of that famous Lindon B. Johnson quote: “The land flourished because it was fed from so many sources–because it was nourished by so many cultures and traditions and peoples.”

The future of the tax reform is also far from clear, although tweaking the tax code is undeniably easier than deciding the fate of millions of people. Last month, during a speech in Indiana, President Trump suggested some major changes. Here is a quick recap:

  • The plan would collapse individual tax brackets from seven to three, with tax rates of 12%, 25% and 35%; the current top rate is 39.6% and the lowest rate is 10%. The Congress may also create a higher, fourth, rate above 35% in the tax plan
  • The standard deduction will be doubled to $12,000 for individuals and to $24,000 for married couples filing jointly. That would allow people to avoid a complicated process of itemizing their taxes to claim various credits and deductions. It would increase the child tax credit from $1,000 to an unspecified amount, and create a new $500 tax credit for non-child dependents, such as the elderly;
  • The alternative minimum tax and the estate tax, a levy on inherited wealth that Republicans have long despised, are slated for termination;
  • Last but not the least, the proposal suggests a reduction of the corporate tax rate to 20% from 35%; the shift purports to make American companies more competitive. A new tax rate of 25% would also be created for so-called pass-through businesses such as partnerships and sole proprietorships, which are currently taxed at the rate of their owners. The U.S. media reported that about 95% of businesses in the United States are structured as pass-throughs and they generate a majority of the government’s corporate tax revenue.

As always, the devil is in the details. Such a plan may not be as easy to sell as some hope to the GOP-dominated House and especially to the Senate, where the Republican’s majority is razor thin. Fiscal conservatives are worried about the possible $2-trillion increase in the budget deficit because of the reduced tax revenue, while Democrats are concerned about slashes in government spending that these tax cuts may necessitate. Everyone, of course, is fretting from their own perspective about the degree to which U.S. taxation balances the needs of the society as a whole, stimulates (or does not) the economy and creates a system that is perceived as fair by all.

The latter part is of crucial importance to the success of both key reforms – immigration and taxation. Laws that are considered equitable and just, will be obeyed. Those that are seen as unduly oppressive, restrictive or poorly written will be skirted, no matter the degree of enforcement. In either case, the status quo seems untenable.