Yesterday, the House Republicans released their tax bill, the Tax Cuts and Jobs Act. This tax bill is the centerpiece of their legislative agenda, as well as that of President Trump. This proposal is a starting point. The final bill will likely look different from this initial bill. I will give a summary of the bill, the road forward, and look at some of the winners and losers under this bill.
This bill would be the biggest change in the tax law since the Tax Reform Act of 1986. The fact that it has been over 30 years since the last major reform shows the difficulty of passing significant tax legislation. There are always winners and losers when the tax law is changed. The Republicans wrote the bill without seeking any Democratic input and the Democrats are expected to oppose it unanimously because they believe that most of the benefits would go to the rich.
The focus of the bill is the permanent cut in the corporate tax rate from 35 percent to 20 percent. The Republicans believe that the tax cut would stimulate the economy and grow wages, while the Democrats believe that most of the benefits would go to the rich.
For individuals and families, there would be four tax brackets from the current seven ranging from 12 percent to 39.6 percent. The lowest rate would increase from 10 percent to 12 percent. The top rate is unchanged from the current top, except it would be only on income above $1,000,000 for married filing jointly and $500,000 for single. Currently the top rate for married filing jointly is for income over about $470,000.
The standard deduction would just about double, going to $12,000 for individuals and $24,000 for married filing jointly. The exemptions would be eliminated. They are currently $4,150 for each taxpayer and dependent. This could hurt families with three or more children. The child tax credit would be increased from $1,000 to $1,600.
The deduction for state and local income taxes would be eliminated. The property tax deduction would be capped at $10,000. The mortgage interest tax deduction is also reduced. For new mortgages, only mortgage interest on $500,000 of principal could be claimed.
Some other deductions that are eliminated are educator expenses, student loan interest, medical expenses, and the adoption credit.
One other provision in the plan is the reduced tax rate for pass-through entities, such as partnerships and S corporations. The new top rate for these entities would be 25 percent rather than the current top rate of 39.6 percent. For passive owners the 25 percent rate would apply to all of their income. Active owners that work in their business would have the lower rate on 30 percent of the income and the regular rate on the rest. Personal services firms such as law firms and accounting firms could not use the 25 percent rate.
The estate tax threshold would be increase to $10 million and then the estate tax would be phased out completely in 2023. The alternative minimum tax would also be eliminated.
The Road Ahead
The road to passage of a tax bill will be rocky. The Republicans hold slim majorities and very few, if any, Democrats are expected to vote for it. There is a lot of disagreement among the Republicans. Republicans in states with high state and local taxes have concerns about the bill. The industries and constituencies that would be hurt by it are speaking out against it. There has been a big campaign by the President and the congressional Republicans for a middle class tax cut. If the tax bill is perceived by the public as primarily benefiting the rich, it could lose support. And there are very few days left on the legislative calendar this year to pass it along with other important legislation.
- Corporations – Corporations would receive a large tax cut from 35 percent to 20 percent under this bill.
- Wealthy individuals – Since much of wealthy people’s wealth tends to come from ownership of capital, the cut in the corporate rate would benefit them.
- High-income taxpayers – For those filing married jointly, the income from $470,000 to $1,000,000 is taxed at a lower rate.
- Heirs – The elimination of the estate tax would benefit heirs of large estates by millions.
- Residents of states with high state and local taxes – They would lose what in some cases could be a sizable deduction.
- The housing industry – The mortgage interest deduction would be reduced for new homes with mortgages over $500,000. This would hurt taxpayers in that situation and would reduce the incentive to build and buy homes. Builders, lenders, and real estate agents would be hurt.
- Charities – Because of the increased standard deduction, fewer people would itemize, which could reduce contributions to charities.
- The national debt – This legislation would increase the national debt by $1.5 trillion over the next 10 years.
As I mentioned before, the tax bill that was released yesterday is a starting point and it will certainly change before any final bill is enacted. I will continue to watch the developments and will summarize whatever final bill, if any, is eventually passed into law.