By: Andrew Magloughlin
House Ways and Means Committee Chairman Rep. Kevin Brady (R-Texas) unveiled the long-awaited Republican tax plan yesterday, dubbed the Tax Cut and Jobs Act. This bill delivers many of President Donald Trump’s campaign promises by lowering taxes for a whopping 94% of Americans.
If passed by Congress, the Tax Cut and Jobs Act would save the average family of four $1,182 per year while easing blockades that keep jobs and capital overseas. The plan is expected to add only $1.5 trillion to the national deficit over ten years. Portions of this deficit could be financed through savings and growth earned in President Trump’s war on awful regulations, additional attempts to repeal Obamacare, and potentially upcoming welfare reform.
Regardless, let’s look at the big changes.
Brackets & Basics
The Tax Cut and Jobs Act would consolidate seven tax brackets into four. The Wall Street Journal succinctly depicts bracket changes in the graphic below. The new brackets stand at marginal tax rates of 12% up to $45,000 of income, 25% up to $200,000 of income, 35% up to $500,000 of income, and 39.6% for anything above.
Lost among the details is the fact that there’s an effective 0% tax rate on individuals earning less than $12,000. Under the GOP plan, the standard deduction doubles. This covers for the elimination of the lowest bracket while simultaneously lowering taxes for Americans currently earning less than $45,000. We’re winning big league, folks.
Of course, as will always be the case under progressive tax systems, wealthier Americans will benefit the most. Individuals making $91,900 or above will see huge cuts across the board. While the top tax rate of 39.6% remains, it activates at a higher income threshold, delivering tax cuts for the richest Americans as well.
The Tax Cut and Jobs Act also delivers President Trump’s vaunted promise of a 20% corporate tax rate. Among all things, this is likely the most important reform. Reducing our corporate tax rate makes American businesses more competitive. Corporate taxes are an operating cost paid by businesses, and when they’re lower, that means the cost of business drops. More firms can enter the market with lower costs, and existing firms will benefit from reduced costs as well.
Currently, the United States has the fourth-highest effective corporate tax rate among G-20 countries. So even after companies claim exemptions, deductions, and loophole escape routes, our businesses still carry a large burden.
A point seldom-spoken by politicians is that lowering the corporate tax rate will reduce the costs of goods and services en masse. Operating fees like the corporate tax rate are reflected in the prices of goods. When you reduce these fees, prices will go down too! This means basically everything will cost less. Your diet coke at lunch will cost less, your morning Starbucks will cost less, and so will your dental appointment to fix cavities from drinking all this garbage!
The GOP tax plan also gradually guts the death tax and slashes repatriation rates, two noted job killers. The current 35% tax on repatriation of corporate revenues keeps investment outside of the United States. Even Apple CEO Tim Cook, who donated over half a million dollars to Hillary Clinton, gave vocal support for this GOP reform.
One point of contention is the “pass-through” tax rate of 25%. People who own small businesses such as S corporations and C corporations file their businesses’ taxes under their own income. The “pass-through” rate is a special rate applied to these individuals. Small business advocates hoped for a 20% rate, seeing that this would lessen distortion between corporate income and small business income. The 25% rate is still a reduction from the current 39.6% rate nonetheless.
President Trump’s plan repeals and drastically trims down the special interests of the Washington elite, otherwise known as tax deductions. As previously mentioned, his plan doubles the standard deduction from $6,000 to $12,000 and eliminates the personal exemption. This new, big deduction should disincentivize itemization and save people tons of money. Two huge overhauls are the near-elimination of the state and local tax deduction (SALT) and the halving of the earned mortgage interest rate deduction.
SALT is a 100-year-old deduction beloved by wealthy liberals, a policy left over from the worst president in American history, Woodrow Wilson. Today, it discriminates against Republicans. SALT is an itemized deduction that allows tax filers to exclude from their federal tax base income paid towards state property, income, and sales taxes.
SALT is claimed overwhelmingly by the wealthy. Only 30% of taxpayers itemize, and most itemizers are in the upper two income quintiles. About 50% of SALT benefits go to people with incomes exceeding $200,000. Residents of New York, New Jersey, and California claim 39% of SALT benefits although they host only 18% of the United States population.
The result is that fat-pocketed big government liberals in New York, California, and New Jersey get to write off the costs of their failed policies. SALT screws low-tax patriots in fiscally responsible – Republican – states. Sad!
But not for long! The Republican plan reduced SALT to a mere $10,000 maximum property tax deduction. Maybe now that they’ll pay the prices of their policies, big government liberals will realize that taxation is theft. Republicans can start winning elections in these places too.
The earned interest mortgage tax rate is a subsidy for wealthy people, realtors, and the construction industry. It allows people to exempt interest paid on mortgages from their federal tax base, which results in a lot of stupid decision making and reckless distortions. It was supposed to help low-income people buy homes, but instead, it helped folks in Martha’s Vineyard buy their 7th beach house.
Almost all benefits of the earned interest mortgage tax rate go to families with incomes of $100,000 or more. Most benefits go to families with $200,000 or more. All this does is encourage people to buy as $600,000 house instead of a $500,000. It’s a subsidy for debt, and it distorts the housing market towards resource that people truly don’t need. Meanwhile, low-income people get no benefits.
Gone are the alimony deduction, the student-loan interest deduction, the moving deduction, and the medical-expenses deduction. So are special tax breaks for sports stadiums. The alternative minimum tax rule, which forces a minimum tax rate on individuals with insanely high deductions, is shit-canned too, seeing that the bill eliminates too many deductions for it to be relevant. Charitable contributions are still deductible.
The President’s plan also increases the child tax credit to $1,600 and adds a $300 tax credit for non-child dependents. Senators Marco Rubio (R-Fla.) and Mike Lee (R-Utah) along with Ivanka Trump were influential advocates for providing this additional relief to families.
A simplified tax code delivers better tax incidence. The convoluted 72,000-page mess that we call the federal tax system is wrought with special interest loopholes and painful distortions. With bracket consolidation and elimination of deductions and credits, the existing tax base will broaden. Current taxes will apply to more situations, spreading the burden more evenly among the public. Like Charmin Ultra says, less is more.
The result of improved tax incidence is market efficiency. A broader, simplified tax base means fewer price distortions. Prices will closely reflect the real demand for goods and services, and resources will flow to the needs of the American populace, not the back-slapping lobbyists in Washington.
The Winning Won’t Stop
President Trump’s campaign promise of a simpler, cheaper, and better tax code is now inscribed on paper. It delivers all sorts of benefits for families, businesses, and the general American Dream. Republicans of all shades want Speaker Ryan and Leader McConnell to get this bill passed. Democrats probably, but secretly, do too because the benefits you feel from tax reform aren’t dictated by your party registration.
With tax reform signed into law, the malaise of the 2009 financial crisis would finally abate, and the United States of America could tread forward towards the greater prosperity that generations have missed. Plus, the Republican Party can kick some ass in the 2018 midterm!
Photo Source: CNN Money