Media outlets, for the most part, are repeating the same talking points. The Tax Cuts and Jobs Act’s main feature is a reduction of the corporate tax rate from 35 to 21 percent, the lowest rate Republicans found workable. The bill would preserve seven personal income tax brackets, lowering the rates while doing away with the personal exemption. At the low end, the number of people expected to owe nothing in income tax will grow from 44 to 47.5 percent; the lowest nonzero tax bracket will be 10 percent. At the upper end, individuals earning $500,000 and up, or couples earning at least $600,000, will pay 37 percent on what’s left after loopholes. Without the bill, they would continue to pay 39.6 percent. The business tax cuts would be permanent, but changes to the individual rate structure would sunset in 2025.
Whereas there currently is no cap on state and local tax deductions, the bill would cap the deduction for combined sales, income, and property taxes at $10,000. The child tax credit would be doubled to $2000 per child for families earning up to $400,000 a year. Up to $1400 of the credit could be paid via check to families not earning enough to pay taxes. The death tax, instead of applying after $5.5 million is inherited, would go into effect after $11 million. Alternative minimum taxes for businesses would be done away and would only apply to persons earning $500,000 or more. Persons who pay their business taxes as personal taxes would be able to deduct 20 percent of their income up to $315,000. Interest deductions would be capped for new mortgages up to $750,000 instead of $1 million. And, in 2019, the individual mandate of Obamacare would be repealed.
Items considered for change but left unaffected include taxes on 401(k) plans and deductions for charitable gifting, excessive medical expenses, and student loans. A proposed tax on tuition waivers for graduate students was dropped after walkouts were staged across the country. Miscellaneous items that would no longer be deductible include home office expenses, licensing and regulatory fees, bad business debt, union and professional dues, and more obscure expenses like laboratory breakage fees. An attempt to repeal the Johnson Amendment, which bans religious and otherwise tax-exempt organizations from endorsing or fundraising for political candidates, was overruled by the Senate parliamentarian.
Like other bills, this one is not difficult to read; the challenge is unraveling the intentions and applications, the special privileges and penalties drafted in general language decipherable only by persons with insider knowledge. Fern Shubert, who served multiple terms in both houses of the North Carolina General Assembly, was expert at identifying legislative subtleties. When asked how she did it, she said she holed up in her hotel room reading bills while her peers were out wining and dining with lobbyists. Analysts at the Wall Street Journal have been giving the bill the Shubert treatment, “following the twists and turns” on the web page, “GOP Tax Plan: Live Coverage.” Recent highlights include, “Final Tax Bill Targets the Free Food at Your Office,” and, “Tax Credit for Electric Vehicles Survives, in Win for Tesla and Other Auto Makers.”
First-order analysis shows the cut depriving the federal government of $1.5 trillion over the next ten years. But calculations from groups like the left-leaning Tax Policy Center, the presumably middle-of-the-road Congressional Joint Committee on Taxation, and the right-leaning Tax Foundation paint different pictures. Numbers can be presented in dollars or as a percentage using different denominators. For example, the JCT treats benefits received under Obamacare as current taxable income that would be taken away when the funds are typically transferred directly from the government to insurance companies. While individual impacts will depend on factors like deductible medical expenses and number of children, the cuts would reduce taxes for most people.
The next question is whether, as Republicans argue, the cuts would incentivize business enough to compensate for any losses. The Treasury Department published a curious one-page report saying if the government increases infrastructure spending; continues deregulating; and reduces waste, fraud, and abuse in welfare programs; the economy will boom, and the bill will be self-funding. The report assumed a 3.0 percent growth rate for the next decade, compared to the current rate of 1.8% and the projected rate of 1.9 percent. Treasury Secretary Steven Mnuchin continues to promise to produce calculations leading to his conclusion the plan will net $2.5 trillion over the next decade.