Congress adopts Trump’s reform bill; changes in tax code to benefit businesses, households
The champagne corks were popping on Capitol Hill and at the White House this past week. The major tax code reform bill President Donald Trump has promised since he was a presidential hopeful in 2016 was adopted by Congress on a razor-thin vote of 51-48. Only Sen. John McCain (R-Arizona) was absent because he’s being treated for brain cancer. But he had already expressed his approval.
We have long praised Trump for his business-style approach to running the government, a method that has led to major increases in the stock market, lots of new jobs, the first 3%-plus increase in GDP since before President Barack Obama took office and a feeling of optimism that has spread from the business and industrial sectors to households around the nation.
As with any major piece of legislation, all is not rosy. Not a single Democrat voted for the bill, meaning whatever happens with tax reform measure in the years ahead will get nothing but disdain from the other side of the aisle. But there are major benefits in the bill, measures that House Minority Leader Nancy Pelosi is apparently blind to in her assessment that Republicans will “rue the day” they pushed forward on the reform package.
What does all this mean? After extensive analysis of stories posted on the Internet, it appears economists feel the bill will provide a boost to the US economy in the short-term. But the size and length of that boost remain questionable.
The Joint Committee on Taxation said the bill will push growth in the GDP by 0.8 percentage points during the first 10 years of the bill’s tenure.
Goldman Sachs estimates GDP growth at 0.3 percentage points above baseline in 2018 and 2019. Analysts for the Penn-Wharton Budget Model said the annual hike would be between 0.06 points and 0.12 points.
These numbers apparently don’t include GDP growth that has already happened – increases that far exceed anything registered during the eight years of the Obama administration.
As stated by President Trump at a White House news conference: “We’re going to see something that’s going to be very special. We’re bringing the entrepreneur back into this country. We’re getting rid of all the knots and all the ties. And ultimately, what does it mean? It means jobs, jobs, jobs, jobs.”
Let’s look at the impacts in summary. This is what will happen in the business community:
- Corporate rate drops to 21%, down from 35% under current law. Takes effect in 2018.
- Eliminates corporate Alternative Minimum Tax, which had been “rolled back,” but not repealed in previous versions, according to Sen. John Cornyn (R-Texas).
- Pass-through deduction rate set at 20% for first $315,000 of joint income
Impacts on the wealthy:
- Top individual rate drops to 37%, down from 39.6% under current law.
- Individual Alternative Minimum Tax exemption increases to $500,000 for individuals, $1 million for couples filing jointly.
- Doubles the amount of the current exemption from the Estate Tax (currently $5.5 million).
For the middle class:
- Standard deduction increases from $12,700 to $24,000 for joint returns and from $6,350 to $12,000 for individuals. The Tax Policy Center says more than two-thirds of Americans take the standard deduction when filing taxes.
- Creates seven tax brackets + a 0% rate: 10%, 12%, 22%, 24%, 32%, 35%, 37%
For those who itemize instead of taking the standard deduction:
- State and local tax deduction capped at $10,000 combined from any/all categories (property/income/sales taxes). Current law caps property tax deduction at $1 million. There are no current caps on state/local income tax deduction.
- Mortgage interest deduction capped at $750,000, down from $1 million under current law.
- Graduate school stipend deduction preserved.
- Student loan interest deduction preserved.
- Medical expense deduction preserved, allowing Americans to deduct medical expenses not covered by insurance that exceed 10 percent of adjusted gross income.
- Child tax credit preserved. Expanded from $1,000 to $2,000 and refundable up to $1,400. Had previously been refundable up to $1,100 but Sen. Marco Rubio (R-Florida) got it raised.
- Adoption tax credit is preserved
- Repeal of individual mandate that required individuals to purchase health insurance through Obamacare or be fined.
Most American taxpayers will see a tax cut as a result of the bill. How much of a cut depends on a variety of factors. Overall, the Tax Policy Center estimated that the average American will get a tax cut of $1,610 in 2018. The center also says every income bracket will get a tax cut. People in the middle quintile of earners would get a cut of $930 on average in 2018 and $910 by 2025. Overall, about 80% of people would see a tax cut in year one of the legislation
But different income groups will see different benefits — and some none at all.
Tax reductions for individuals expire after 2025. Republicans argue that this predictable ending would be mitigated by Congress extending the individual decreases in the meantime.