December 20, 2017
The Republican-led Congress passed a sweeping overhaul of the US tax code on December 20th just days before their holiday recess. The bill totals an estimated $1.5 trillion in tax cuts. Its main focus is on cutting taxes on businesses of all kinds and on reducing taxes for wealthy individuals.
Highlights of the new tax bill include: a permanent reduction in the corporate tax rate from 34 to 21 percent; businesses also will be able to write off their investments in capital expenditures right away instead of waiting several years; and small businesses will get a reduction in their business taxes. Businesses also will get a 25% deduction for income from partnerships, S Corporations, and sole proprietorships (providing incentives for business to set up such pass-through entities. Businesses that have depreciable property that wears out over time will get an additional 20% deduction even if they don’t have many employees.
The wealthiest Americans would have their tax rate slashed from 39.6% to 35% and benefit from reductions in the estate tax, a levy on inheritance paid only by the wealthiest Americans. Middle class and poor families would get some modest reduction in taxes, but these are temporary and will begin to expire in 2019. The maximum amount deductible under the Child Tax Credit (CTC) will increase to $2,000 with no limit on the incomes of those who can utilize it. ( Wealthier people will be able to make greater use of the CTC than middle class and poor people.) The ability to make a standard deduction for every taxpayer and dependent on a return will be eliminated until 2025.
There also are several politically loaded components to the bill including: a limitation on the ability to deduct (beyond the 1st $10,000 in value) the cost of state and local taxes on federal income tax returns (a clause that will especially penalize traditionally democratic states such as California and New York with high state and local tax rates.)The tax bill also ends the Obamacare mandate that all Americans must have health insurance. And it will add at least $ 1 trillion dollars to America’s budget deficit.
The new Republican tax bill will mainly benefit corporations and wealthy individuals. Middle class and lower income individuals and families will receive a few benefits, but most of these are temporary and scheduled to end in a few years. The theory behind the new bill is that providing tax breaks to the wealthy will free up income that will be invested and help the economy grow, create jobs, and narrow the income gap. However, this approach has failed to work many times before, going back to the tax cuts made by Ronald Reagan under what was known as “trickle-down” economics. Instead of leading to greater investments jobs, tax cuts for the rich usually result in just more profits for those at the top.
The Congressional Budget Office estimates that 13 million Americans may lose access to health care as a result of the tax bill’s repeal of the Obamacare individual mandate, a move that is likely to drive up the cost of health insurance. Taxpayers can deduct medical expenses that exceed 7.5 percent of AGI in 2017 and 2018, but the new deduction level ends Jan. 1, 2019.
The fact that the new bill will add at least $1.5 trillion to the current budget deficit, already at$ 20 trillion, is cause for concern. The government will need to find new sources of revenue to reduce the deficit, something that many think the Republicans will try to do by reducing entitlement programs such as Medicare, Medicaid, and social security.
This new bill was rushed through Congress with no hearings and no bipartisan support. In the House and Senate, no Democrats voted in favor of the bill. The reason for this is President Trump and Republican desire to have some legislative victory during Trump’s first year in office. But the victory is sure to come at the expanse of voter anger at the polls in 2018. Almost all public opinion surveys show that the new tax bill has the least amount of popular support in the history of tax bill legislation.
It also is worth noting that President Trump and his family, along with other members of his administration stand to gain significant reductions in their taxes from the new bill, for example through changes in the estate tax, and the special exemptions for the type of businesses that they own.
- Tax Policy Center: (www.taxpolicycenter.org) – The Urban-Brookings Tax Policy Center aims to provide independent analyses of current and longer-term tax issues and to communicate its analyses to the public and to policymakers in a timely and accessible manner. The Center combines top national experts in tax, expenditure, budget policy, and microsimulation modeling to concentrate on four overarching areas of tax policy that are critical to future debate.
- Institute on Taxation and Economic Policy (www.itep.org) – The Institute on Taxation and Economic Policy (ITEP) is a non-profit, non-partisan research organization that provides timely, in-depth analyses on the effects of federal, state, and local tax policies. ITEP’s mission is to ensure the nation has a fair and sustainable tax system that raises enough revenue to fund our common priorities, including education, healthcare, infrastructure and public safety.
This brief was compiled by Ron Israel. If you have comments or want to add the name of your organization to this brief please contact email@example.com.