The voices of Tax Policy Center's researchers and staff
The Senate’s version of the Tax Cut and Jobs Act (TCJA) is a big, sprawling bill that makes hundreds of changes in the tax code. The Senate bill differs in some important respects from the House-passed version, but the basic framework of the two measures is the same: A roughly $1.5 trillion tax cut that mostly benefits businesses and high-income households. While a few provisions improve the revenue code, the Senate’s TCJA falls far short of the historic tax reform its backers promised.
It is easy to be overwhelmed by the complexity of the Senate bill, but to keep matters simple, here are seven key take-aways:
The price tag. According to the congressional Joint Committee on Taxation, the bill would reduce federal revenue by about $1.5 trillion over the next decade. But after taking into account its delayed effective dates, the scheduled expiration of many provisions, and other gimmicks aimed at making the bill look less costly than it really is, the real 10-year revenue loss is likely to be significantly more.
Individual income tax: About one-third of the bill’s net tax cuts would come from reductions in the non-business portion of the individual income tax. The biggest proposed changes: new tax brackets; increases in the standard deduction and the child credit; and repeal of personal exemptions and the deduction for most state and local taxes. In addition, the bill would use a less generous formula for indexing the tax code for inflation, thus gradually raising individual income taxes across-the-board. It would also increase the estate tax threshold to $11.2 million ($22.4 million for couples). The Senate bill calls for all the individual provisions except for the inflation adjustment to expire by 2026. Taxation of most investment income and most individual tax preferences would be untouched.
Itemized deductions: The biggest structural change in the individual income tax is its effect on the role of itemized deductions. By boosting the standard deduction and repealing most of the state and local (SALT) tax deduction--the single biggest itemized deduction for many taxpayers—it would make itemized deductions irrelevant for more than 90 percent of all households. The Tax Policy Center estimates that the House bill (which also retains a piece of the SALT deduction) would reduce the number of itemizers from about 46 million to just 13 million in 2019. While the Senate bill would retain most itemized deductions, they’d be used primarily by high-income taxpayers. This change could upend certain sectors of the economy, such as housing and non-profits, that have largely built their business models on widely-available tax deductions.
Pass-through businesses: The bill would effectively lower tax rates on some owners of pass-through businesses such as partnerships and sole proprietorships by allowing them to deduct 23 percent of their revenue from taxable income. But some business owners would be unable to benefit from the tax cut. Overall, the bill would cut taxes on income from pass-throughs by about $350 billion over 10 years, with most of the benefit going to the highest income households.
Corporations: The bill would reduce net corporate taxes by about $600 billion over 10 years. The headline is a cut in the corporate income tax rate from 35 to 20 percent. But equally important is the way it would treat cross-border transactions of US-based multinationals. The bill would impose a 10 percent minimum tax on their overseas income but only on profits in excess of “routine” returns. My colleague Steve Rosenthal estimates that firms would pay an effective tax rate of as low as 5 percent on those foreign earnings. The Senate bill would also tax unrepatriated foreign earnings at 14.5 percent (for accumulated earnings held in cash) or 7.5 percent (for other assets).
Health care: The Senate’s TCJA would eliminate the Affordable Care Act’s tax penalty on those who do not have health insurance. The Congressional Budget Office estimates that 13 million more people would not have insurance coverage, as a result. That, in turn, would reduce the government’s cost for premium tax subsidies and Medicaid by about $330 billion over 10 years.
Economic growth. The primary goal of this tax bill, according to President Trump and congressional Republicans, is to strengthen the economy. But, according to a TPC analysis, the bill would generate very little additional economic growth over the next decade. US Gross Domestic Product would be roughly the same in ten years, whether the TCJA becomes law or not.
TPC found that the Senate bill would boost the economy in the short run, primarily by increasing demand for goods and services. Corporate tax rate cuts would increase capital investment and long run growth if they were financed with offsetting revenue-raisers or spending cuts. But because the bill would add more than $1 trillion to the debt over the next decade even after taking into account added growth, higher interest rates would wash out most benefits of the tax cuts. The congressional Joint Committee on Taxation and the Penn-Wharton Budget Model reached similar conclusions.
At first glance, the TCJA is big and complicated, but as the bill works its way through Congress keep an eye on these seven big issues and you’ll have a pretty good sense of what it really means.
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