The voices of Tax Policy Center's researchers and staff
The final version of the Tax Cuts and Jobs Act that Congress is likely to approve this week broadly follows the framework proposed by Donald Trump in his 2016 presidential campaign but is far less ambitious. And it fails to achieve many of the key goals that were at the heart of Candidate Trump’s promises.
Trump promised an historic tax rate cut for individuals, corporations, and non-corporate businesses. He vowed to double the standard deduction and eliminate—or at least cap-- all individual income tax deductions except for mortgage interest and charitable giving. He vowed to repeal the carried interest rules that tax some compensation of hedge fund managers at relatively low capital gains rates rather than as ordinary income. He promised that middle-income households would receive historically large tax cuts. And his Treasury Secretary promised that high-income households would receive “no net tax cut.”
For corporations, Trump said he’d create a territorial tax system that would encourage firms to locate their production in the US and punish firms for producing overseas. And all of this, the White House has repeatedly insisted, would generate so much economic activity that federal tax revenues would go up, and not down, despite this massive tax cut.
By the president’s own standards, how did he do?
The tax cut Congress seems about to pass is far smaller than what the president promised. It would be only about one-quarter the size of Candidate Trump’s final plan, according to Tax Policy Center estimates. The bill would substantially cut tax rates for corporations and pass-through businesses, but cut individual income tax rates by only a few percentage points. While it limits the state and local tax (SALT) deduction, it preserves many other individual tax preferences. Curiously, the mortgage interest deduction is one it would cut back.
Individual income tax rates. The final Trump campaign plan would have reduced the top individual income tax rate from 39.6 percent to 33 percent, but the bill would bring it down to only 37 percent. Candidate Trump proposed repealing the individual Alternative Minimum Tax (AMT) but the bill retains a scaled-down version of the alternative levy. The income tax rate reductions as well as nearly all other individual tax changes are scheduled to expire before the end of 2025. Trump never said these tax cuts would be temporary.
Tax cuts for middle-income households. Starting with the campaign and through his first 11 months in office, the president and his surrogates have repeatedly insisted that the tax bill would primarily benefit “middle-class” households. While the bill raises some taxes on individuals and cuts others, TPC estimates that the net effect would be an initial tax cut of less than $1,000. But by 2027, when most of the bill’s individual income tax provisions are due to expire, middle-income households likely would get no tax cut at all on average, and many would pay more than under current law.
Tax cuts for high-income households. Trump and his surrogates have promised, and then backed off the idea, that high-income taxpayers would not benefit at all from the tax cuts. But the reality is that high-income individuals would get the bulk of the benefit of the tax bill, thanks to the bill’s cuts in the top income tax rate and the AMT, its preferential tax rates for pass-through businesses, its corporate rate cut, and its bigger estate tax exemption.
Tax preferences. In the end, Congress kept nearly all major individual preferences, which helps explain why the rate reductions are so modest. The House version would have eliminated several itemized deductions. But the final bill eliminates some small ones but touches only two of any significance: It would limit the SALT deduction to $10,000 and lower the cap for the mortgage interest deduction from interest on $1 million of indebtedness to $750,000. By increasing the standard deduction, the bill would discourage many taxpayers from itemizing, thus reducing tax benefits for mortgage interest and charitable giving.
Pass-through businesses: Candidate Trump proposed taxing owners of pass-through businesses such as sole proprietorships, partnerships, and S corporations at a flat rate of 15 percent rather than at regular individual income tax rates. Instead, the final bill would tax pass-throughs at ordinary rates (10-12-22-24-32-35-37 percent in the final bill) but allow their owners to deduct 20 percent of their income. That would effectively set a top rate of 29.6 percent, about twice what Trump promised in the campaign. The bill also includes limits on the ability of some business owners to take advantage of the lower rate.
The corporate income tax. Trump promised to cut the top corporate income tax rate from 35 percent to 15 percent. The final bill would bring it down to 21 percent. Candidate Trump proposed shifting to a territorial tax system though he never described how it would work. The final bill creates a modified territorial system that may allow firms to continue to avoid a substantial amount of tax on profits earned by overseas subsidiaries—a structure that may result in them keeping, or even moving, economic activity offshore.
The Affordable Care Act. Candidate Trump often vowed to repeal the Affordable Care Act. He also promised to make insurance available to all. The Tax Cuts and Jobs Act would repeal a key provision of the ACA—the penalty tax that enforces the mandate that people have health insurance. The Congressional Budget Office estimates that ending the mandate would raise premiums in the individual market by about 10 percent a year and eventually result in about 13 million fewer people getting insurance.
Economic growth. No independent analysis finds that the the bill would generate a big long-term boost in economic activity. The TPC, the Penn-Wharton Budget Model, and the congressional Joint Committee on Taxation all project modest short term growth and estimate the bill would have even less effect over the next decade.
In broad strokes, the TCJA tracks the main ideas Trump raised in the campaign—big tax cuts for both corporations and pass-through business. But it is much more modest than his plans. And it falls far short of his promise of a “massive” tax cut for middle-income households.
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Chris O'Meara/AP Photo