A Simple Overview of Trump’s Tax Cuts and Jobs Act

President Donald Trump signed the Tax Cuts and Jobs Act on Friday, December 22nd. The Economist describes this as “America’s first significant tax reform since 1986.” The bill passed the House of Representatives with 224 votes to 201, while it passed the Senate with 51 votes to 48. Here are some of the most discussed aspects of the recent GOP tax plan:

The Tax Policy Center predicts that on average, everyone will save money from this tax bill. The seven federal income tax brackets still stand, but income levels corresponding to each bracket as well as the corresponding rates have changed. Most non-wealthy households will experience lower marginal tax rates, especially middle class families, but these cuts only apply temporarily before most expire by Dec. 31, 2025. Former U.S. Secretary of Labor Robert Reich describes these tax cuts as a “Trojan horse”.

The tax bill cuts the corporate tax rate from 35 percent to 21 percent, which benefits industries such as retailers, manufacturing, and health insurers. The bill also benefits pass-through businesses, businesses that do not pay corporate income tax and whose profits go directly onto their individual tax returns. Taxes for pass-through businesses will decrease from 39.6 percent to below 30 percent. The Wall Street Journal offers a comprehensive analysis of how the GOP plan affects different businesses.

The tax reform bill eliminates personal exemptions. The bill also almost doubles standard deductions while decreasing the number of itemized deductions, which will lead to increased incentive to use standard deductions rather than itemized deductions. Higher standard deductions can give Americans less incentive to perform activities that count toward itemized deductions, such as contributing charitable donations. Realtors also may not do as well, due to decreased relevance of the mortgage interest deduction, another itemized deduction. The bill still keeps the alternative minimum tax (AMT), as well as deductions for medical expenses, although the medical expenses deduction has a high threshold. The tax plan also limits certain interest deductions, so companies carrying a lot of debt will become negatively affected in that area of their finances.

The recent tax reform also changes the rules of the game in international trade. One significant change includes the lowering of taxes on profits made on exports, or export subsidies. These subsidies target foreign multinational companies that may have been stripping earnings from the U.S. tax base due to lower corporate taxation on profits outside the U.S. After all, foreign multinational companies have “long shown low profits” in the U.S. Therefore, the bill would have a larger effect on foreign multinationals with greater presence in the U.S. market. These subsidies may violate rules of the World Trade Organization, however.

The GOP claims that the tax cuts and boost to large businesses and corporations will strengthen the economy further. Republican Senate Majority Leader Mitch McConnell claims that tax reform will have the economy “performing better”, but this boost may only be temporary. The stimulus from the tax reform on top of an already strong economy could describe the situation as “an economy on steroids” as the 2018 and 2020 elections loom closer. The GOP claims that the benefits of the tax reform will reach working people, through mechanisms of trickle-down theory. However, trickle-down theory would not necessarily work well with our current economic circumstances in the long-run.

For example, some speculate that corporations will not do much to help working citizens with the money they save from taxes. Corporations may instead take that money to increase salaries of executives and reward shareholders with higher dividends. In addition, the Tax Foundation, a think-tank usually optimistic about tax cuts and their effects on growth, predicts that the bill will only increase long-run GDP by about 1.7 percent, or about 0.3 percent GDP growth annually over the next 10 years. On the other hand, these cuts will increase the large national debt of $20 trillion by up to another $2.2 trillion, according to the Center on Budget and Policy Priorities. Many organizations and economists believe that the overall size of the deficit caused by the tax cuts cannot be covered by the temporary boost up front. Furthermore, to shrink the larger national deficit in the future, congressional Republicans will likely first target Medicare, Medicare, and Social Security.

Additional changes made by the tax bill include the elimination of the individual mandate from the Affordable Care Act, starting in 2019. Also, federal estate tax exemptions will double, which will cause the government to receive around $10 billion less in tax revenue. The top estate tax rate remains the same, however, at 40 percent. Another significant effect of the tax bill is on universities, as it now taxes returns from university endowments. Furthermore, the Arctic National Wildlife Refuge is now open to oil companies for drilling.

Image Credit to the Washington Examiner: http://www.washingtonexaminer.com/40-conservative-groups-rally-behind-house-gop-tax-bill/article/2640126

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