The voices of Tax Policy Center's researchers and staff
House Republicans made their tax bill public today. Boiled down to the basics, it is a mid-sized tax cut--aimed mostly at businesses and their owners. Here are five big take-aways.
- It is a tax cut, not tax reform.
- It is not the biggest income tax cut in history---not even close-- despite President Trump’s repeated promises that it would be.
- For households, it will almost surely create winners and losers. Many middle-income households are likely to pay more under this plan, not less.
- It is not tax simplification. Indeed, for many taxpayers the House bill would make filing more complicated.
- At the end of 10 years, it likely would end up increasing the deficit by far more than the advertised $1.5 trillion.
- It will not lead to a 3 percent permanent economic growth.
What’s in the bill?
The House Republican draft includes major reductions in business taxes combined with many changes in individual taxes.
On the individual side, it would shift the current seven-rate income tax structure to four rates—12-25-35-39.6 percent, plus a zero bracket. The top rate would kick in at $1 million in taxable income, about twice what it is today. The brackets and some tax credits would rise with inflation but by a less generous measure than under current law. The plan would roughly double the standard deduction but repeal the personal exemption. It would increase the child credit, and provide a new $300 credit for other family members—but only until 2022.
It would repeal the Alternative Minimum Tax, cap the deduction for mortgage interest at $500,000 in debt on future home purchases (the cap is currently $1 million), retain the deduction for charitable giving, and repeal the state and local tax deduction except for property taxes up to $10,000. Many other individual deductions would be repealed. It would immediately double the estate tax exemption and repeal the tax after six years.
Business tax changes
For businesses, it would cut the corporate tax rate to 20 percent, allow firms to expense capital investments (but only for five years) and limit the deduction corporations take for interest expenses--though real estate developers and some other business would be exempt. US-based multinational corporations would be subject to a 10 percent minimum tax on their future high foreign profits and pay a 12 percent tax on past unrepatriated profits held in cash (5 percent for non-cash assets).
It would cut the top rate on pass-through businesses, such as partnerships and sole proprietorships, from 39.6 percent to 25 percent. However, some businesses, such as law firms, may not receive the lower rate.
Let’s look at the effects of all this one at a time:
Tax cut or tax reform? There are two possible ways to reform the tax code: Congress could shift to a consumption-based tax system or enact a 1986-like broaden-the-base, lower-the-rates plan. The 2016 House leadership “Better Way” plan included some elements of a consumption tax, principally its destination-based cash flow tax. But that idea was dumped months ago. The House GOP plan would cut rates for many businesses and shuffle tax liability for nearly all households. While it would eliminate many individual tax preferences, it would preserve others and even create new ones.
Biggest in history? Nope. Assuming it reduces federal taxes by $1.5 trillion, as promised, it would be about the 7th or 8th biggest tax cut in modern history. As a share of the economy, it would cut taxes by a bit less than 1 percent of Gross Domestic Product. That’s a relative pittance compared to the Reagan-era 1981 Economic Recovery Tax Act that cut taxes by more than three-times as much—2.89 percent of GDP. Because some tax provisions phase out, and because the bill would use a less generous measure of inflation to index tax brackets and other provisions, the size of the tax cut for many households and firms would shrink over time.
Winners and losers. Despite the president’s claims to the contrary, this will not be a tax cut for every middle-income household. While this plan would be more generous to those households than the Unified Framework that Republicans proposed a month ago, its effects on individual households would be very idiosyncratic. Some will pay more in tax than under current law while others will pay less. It will depend very much on their specific circumstances: Where you live, the size and composition of your household, and how you earn your living will matter. That, of course, is the way it is under the current tax code. And it is why this bill is not really tax reform.
Simplification? By nearly doubling the standard deduction and repealing the Alternative Minimum Tax, it would simplify tax filing for millions of middle-income households. So far, so good. But, for other families, filing would get more complicated. Businesses would get a sweet tax cut, but the price they’d pay is far more complexity. Owners of some pass-through businesses such as partnerships would have to comply with complicated new anti-abuse rules to benefit from the new 25 percent tax rate. Multi-national corporations would have to navigate a new minimum tax unlike any corporate tax anywhere in the world. Accountants and tax lawyers will be very happy.
The effect on the deficit. In the end, the bill will have to fit in the $1.5 trillion box the Senate built for it. But that doesn’t mean it will actually reduce revenues by that much. One reason: The measure is filled with phase-outs that may never happen.
A growth explosion. Not likely. The President claimed his original plan, which was far bigger than this one, would result in 3 percent annual economic growth forever. That prediction was implausible. This proposal would not cut the top individual tax rate at all, its business rate cuts are more modest, and key investment incentives would be temporary. While the smaller size of the tax cut would limit increases in the federal debt, the positive effects of the tax cuts themselves would be more modest.
This is a big, complex, important tax bill. But it falls far short of being the once-in-a-generation tax reform that its backers claim.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.
J. Scott Applewhite/AP Photo